Exhibit 13




HARBOR FLORIDA BANCSHARES FINANCIAL
DATA












|                                                                                     
|-------------------------------------------------------------------------------------
|Selected
Consolidated Financial Data                                                 
|Managements Discussion and Analysis of Financial Condition and Results of Operations
|Report of
Independent Registered Public Accounting Firm                              








14


---



SELECTED CONSOLIDATED FINANCIAL
DATA




Selected Consolidated Financial Condition
Data







|                                            |  |  |  | September 30, |          
|------------------------------------------- |  |  |  | ------------- | ---------
|
|
|Total
assets                                |  |  |  | $             | 3,012,185
|Loans
(net)                                 |  |  |  |               | 2,275,861
|Loans held
for sale                         |  |  |  |               | 10,695   
|Investment
securities-available for sale    |  |  |  |               | 128,586  
|Investment
securities-held to maturity      |  |  |  |               | 285      
|Mortgage-backed securities-held to maturity |  |  |  |               | 388,458  
|Real estate
owned                           |  |  |  |               | 8        
|Deposits                                    |  |  |  |               | 2,056,307
|Short-term
borrowings                       |  |  |  |               | 5,000    
|Long-term
debt                              |  |  |  |               | 590,473  
|Stockholders equity                        |  |  |  |               | 320,511  



Selected Consolidated Operating
Data







|                                                    |  |  |  | Years ended September 30, |        
|--------------------------------------------------- |  |  |  | ------------------------- | -------
|
|
|Interest
income                                     |  |  |  | $                         | 164,885
|Interest
expense                                    |  |  |  |                           | 56,065 
|Net interest
income                                 |  |  |  |                           | 108,820
|Provision for
loan losses                           |  |  |  |                           | 1,915  
|Net interest
income after provision for loan losses |  |  |  |                           | 106,905
|Other
income:                                       |  |  |  |                           |        
|Fees and
service charges                            |  |  |  |                           | 16,718 
|Other                                               |  |  |  |                           | 6,721  
|Total other
income                                  |  |  |  |                           | 23,439 
|Other
expenses:                                     |  |  |  |                           |        
|Compensation
and benefits                           |  |  |  |                           | 31,773 
|Occupancy                                           |  |  |  |                           | 7,823  
|Other                                               |  |  |  |                           | 14,803 
|Total other
expenses                                |  |  |  |                           | 54,399 
|Income before
income taxes                          |  |  |  |                           | 75,945 
|Income tax
expense                                  |  |  |  |                           | 29,749 
|Net
income                                          |  |  |  | $                         | 46,196 
|Net income
per share:                               |  |  |  |                           |        
|Basic                                               |  |  |  | $                         | 2.03   
|Diluted                                             |  |  |  | $                         | 1.98   








2005 Annual Report




15


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SELECTED CONSOLIDATED FINANCIAL
DATA




Selected Financial Ratios







|                                                                        |  |  |  | At or for the years ended September
30, |       
|----------------------------------------------------------------------- |  |  |  | --------------------------------------- | ------
|
|Performance
Ratios:                                                     |  |  |  |                                         |       
|Return on
average assets                                                |  |  |  |                                         | 1.61  
|Return on
average stockholders equity                                  |  |  |  |                                         | 15.31 
|Net interest
rate spread                                                |  |  |  |                                         | 3.78  
|Net interest
margin                                                     |  |  |  |                                         | 3.96  
|Noninterest
income to average assets                                    |  |  |  |                                         | .82   
|Noninterest
expense to average assets                                   |  |  |  |                                         | 1.90  
|Average
interest-earning assets to average interest-bearing liabilities |  |  |  |                                         | 108.70
|Efficiency
Ratio                                                        |  |  |  |                                         | 42.24 
|                                                                        |  |  |  |                                         |       
|Asset Quality
Ratios:                                                   |  |  |  |                                         |       
|Nonperforming
assets to total assets                                    |  |  |  |                                         | .07   
|Allowance for
loan losses to total loans                                |  |  |  |                                         | .87   
|Allowance for
loan losses to non-performing loans                       |  |  |  |                                         | 904.99
|                                                                        |  |  |  |                                         |       
|Capital
Ratios:                                                         |  |  |  |                                         |       
|Average
stockholders equity to average assets                          |  |  |  |                                         | 10.53 
|Stockholders equity to assets                                          |  |  |  |                                         | 10.64 
|Dividend
pay-out ratio                                                  |  |  |  |                                         | 37.44 








16


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MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS




Special Note Regarding Forward-Looking
Statements




This report contains certain forward-looking
statements which are based on assumptions and describe future plans. Harbor Florida Bancshares, Inc. (the Company) desires to take
advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing itself of the protections of the safe harbor with respect to all such forward-looking statements. These forward-looking
statements, which are included in Managements Discussion and Analysis and elsewhere, describe future plans or strategies and include the
Companys expectations of future financial results. The words believe, expect, anticipate,
estimate, project, and similar expressions identify forward-looking statements. The Companys ability to predict results
or the effect of future plans or strategies or qualitative or quantitative changes based on market risk exposure is inherently uncertain. Factors which
could affect actual results include but are not limited to i) change in general market interest rates, ii) general economic conditions, iii)
legislative/regulatory changes, iv) monetary and fiscal policies of the U.S. Treasury and the Federal Reserve, v) changes in the quality or composition
of the Companys loan and investment portfolios, vi) demand for loan products, vii) deposit flows, viii) competition, and ix) demand for financial
services in the Companys markets. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not
be placed on such statements.




Overview




The Company owns 100% of the common stock of Harbor Federal
Savings Bank (the Bank), a federal savings bank whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC). The Bank
provides a wide range of banking and certain insurance services but is principally engaged in the business of attracting deposits predominately from
the communities it serves and using these and other funds to originate primarily residential, consumer and commercial real estate loans. The
Companys results of operations are highly dependent on net interest income. Net interest income is a function of the balances of loans and
investments (interest-bearing assets) outstanding in any one period, the yields earned on such loans and investments, and the interest
incurred on deposits and borrowed funds (interest-bearing liabilities) that were outstanding in that same period. The Companys
noninterest income consists primarily of fees and service charges, insurance commissions, gains on sale of mortgage loans, gains on sale of premises
and equipment and, depending on the period, gains on sale of securities and real estate operations which have either provided income or loss. The
results of operations are also significantly impacted by the amount of provisions for loan losses, which, in turn, is dependent upon, among other
things, the size and makeup of the loan portfolio, loan quality, and other credit trends. The noninterest expenses consist primarily of employee
compensation and benefits, occupancy expense and data processing services. Results of operations are affected by general economic and competitive
conditions, including changes in prevailing interest rates and the policies of regulatory agencies.




The Companys diluted earnings per share for the year
ended September 30, 2005, increased 11.9% to $1.98 per share on net income of $46.2 million, compared to $1.77 per share on net income of $41.0 million
for the same period last year. The increase was due primarily to increased net interest income, resulting from continued growth in loans and other
assets as conditions in the Companys market area continued to support growth and expansion of lending. The Companys growth was funded
primarily with deposits and repayments of mortgage-backed securities. Net interest income increased 15.0% to $108.8 million for the year ended
September 30, 2005, compared to $94.7 million for the year ended September 30, 2004. This was due to an increase in interest income of $22.8 million
but was partially offset by increases in interest expense during the year of $8.6 million, a result of the change in rates paid for deposits and other
funding sources.




The Company operates primarily in seven counties on the
east coast of Florida. As such, the Companys results of operations are affected by the general and economic conditions of the area. Management
believes that the areas rapid population growth and expanding real estate market will support continued earnings growth.




During August and September 2004, several hurricanes passed
directly over the Companys market area within weeks of each other, resulting in property damage throughout the region. The Company provided
services to all of its markets on the first business day after each storm. During the weeks following, Harbor Insurance Agency handled thousands of
insurance claims. The Company noted a temporary increase in past due loans, particularly in the residential mortgage and consumer









2005 Annual Report




17


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MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




loan portfolios. Loan and deposit programs were
implemented to assist customers with their recovery and rebuilding efforts. Certain customers were provided with short-term loan principal and/or
interest deferments and/or extended credit facilities. None of these programs had or is expected to have any significant impact on the financial
position, results of operations and cash flows of the Company. The storm-related damages to the Companys own buildings, which were predominately
covered by insurance, have been substantially repaired and rebuilt.




In the short-term, the changed environment presented
challenges to the operations of the Company as a result of lower levels of originations, loan sales, and fee income. However, management believes that
the area continues to represent an attractive market with strong growth potential.




Critical Accounting
Policies




The following discussion and analysis of our financial
condition is based upon consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the
United States of America. The determination of the allowance for loan losses is considered by management to be a critical accounting policy and is
based upon estimates made by management. Critical accounting policies are defined as policies that are material to the portrayal of the Companys
financial condition and results of operations, and that require managements most difficult, subjective, or complex judgments. The Companys
financial results could differ significantly if different judgments or estimates are applied in the application of these policies.




The Company follows a consistent procedural discipline and
accounts for loan loss contingencies in accordance with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for
Contingencies (Statement 5) and SFAS No. 114, Accounting by Creditors for Impairment of a Loan (Statement
114). The following is a description of how each portion of the allowance for loan losses is determined.




The Company segregates the loan portfolio for loan loss
purposes into the following broad segments: commercial real estate; residential real estate; commercial business; and consumer. The Company provides
for a general allowance for losses inherent in the portfolio by the above categories, which consists of two components. (1) General loss percentages
are established based upon historical analyses. (2) A supplemental portion of the allowance may be established for inherent losses which probably exist
as of the evaluation date even though they might not have been identified by the more objective processes used. This is due to the risk of error and/or
inherent imprecision in the process. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors which
do not lend themselves to exact mathematical calculations such as: trends in delinquencies and nonaccruals; migration trends in the portfolio; trends
in volume, terms, and portfolio mix; new credit products and/or changes in the geographic distribution of those products; changes in lending policies
and procedures; loan review reports on the efficacy of the risk identification process; changes in the outlook for local, regional and national
economic conditions; concentrations of credit; and peer group comparisons.




Specific allowances are provided in the event that the
specific collateral analysis on each impaired loan indicates that the probable loss upon liquidation of collateral would be in excess of the general
percentage allocation. The provision for loan losses is debited or credited in order to state the allowance for loan losses to the required level as
determined above.




The allowance for loan losses was $19,748,000 and
$17,802,000 at September 30, 2005 and 2004, respectively. The Company evaluates impaired loans based on (a) the present value of the expected future
cash flows of the impaired loan discounted at the loans original effective interest rate, (b) the observable market price of the impaired loan,
or (c) the fair value of the collateral of a collateral dependent loan. To the extent that an impaired loans value was less than the loans
recorded investment, a specific allowance was recorded.




The investment in impaired loans (primarily consisting of
classified loans), other than those evaluated collectively for impairment, at September 30, 2005, 2004 and 2003 was $4,213,000, $4,627,000 and
$6,259,000, respectively. The average recorded investment in impaired loans during the years ended September 30, 2005, 2004 and 2003 was approximately
$3,487,000, $5,568,000 and $8,011,000, respectively. There are no commitments to lend additional funds to these borrowers. The total specific allowance
for loan losses related to these loans was $243,000 and $-0- at September 30, 2005 and 2004, respectively. Interest income on impaired loans of
approximately $248,000, $381,000 and $584,000 was recognized in the years ended September 30, 2005, 2004 and 2003, respectively.









18


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MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




There were no significant changes in the estimation methods
or fundamental assumptions used in the calculation of the allowance for loan losses at September 30, 2005, compared to September 30, 2004. Furthermore,
there was no reallocation of the allowance from September 30, 2004. While the Companys management uses available information to recognize losses
on loans, future additions to the allowance may be necessary based on unforeseen changes in economic conditions which could impact borrowers or
markets.




Disclosure on Quantitative and Qualitative
Market Risk and Asset and Liability Management




The Company attempts to manage its assets and liabilities
in a manner that stabilizes net interest income and net economic value under a broad range of interest rate environments. This was accomplished by
matching maturity and repricing periods on loans and investments to maturity and repricing periods on deposits and borrowings.




The matching of assets and liabilities may be analyzed by
determining the extent to which such assets and liabilities are interest rate sensitive. An asset or liability is considered to be interest rate
sensitive within a specific time period if it matures or re-prices within that time period. Interest rate sensitivity analysis, also known as
gap analysis, attempts to measure the difference between the amount of interest-earning assets expected to mature or re-price within a
specific time period compared to the amount of interest-bearing liabilities expected to mature or re-price within that time period. An interest rate
sensitive gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities maturing or repricing within a specified time period. A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets that mature or re-price within a specified time period. Interest rate sensitivity
analysis is based on numerous assumptions, such as estimates for loan repayments prior to maturity. Estimates are revised annually to reflect the
anticipated interest rate environment.




Generally, an institution with a positive interest rate
sensitivity gap can expect net interest income to increase during periods of rising interest rates and decline during periods of falling
interest rates. Likewise, an institution with a negative gap can expect an increase in net interest income during periods of falling
interest rates and a decrease in net interest income during periods of rising interest rates. At September 30, 2005, the Companys cumulative
one-year interest rate sensitivity gap was negative 0.17%.




The Board of Directors has established an Asset/Liability
Committee, which consists of the Companys president and other senior officers. The Committee meets monthly to review loan and deposit pricing and
production volumes, interest rate risk analysis, liquidity and borrowing needs, and a variety of other asset and liability management
topics.




The Company currently utilizes the following strategies to
reduce interest rate risk: (a) the Company seeks to originate and hold in the portfolio adjustable rate loans which have periodic interest rate
adjustments; (b) the Company sells a portion of newly originated fixed rate residential mortgage loans; (c) the Company seeks to lengthen the
maturities of deposits when deemed cost effective through the pricing and promotion of certificates of deposits; (d) the Company seeks to attract low
cost checking and transaction accounts which tend to be less interest rate sensitive when interest rates rise; and (e) the Company has utilized long
term Federal Home Loan Bank (FHLB) advances to fund the origination of fixed rate loans. The Company also maintains a high level of liquid
assets consisting of short-term securities as well as medium-term securities. These securities have expected average lives in the two to three-year
range. Management expects that cash flow from investment maturities and repayments can be reinvested at higher yields in a rising interest rate
environment.









2005 Annual Report




19


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MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Interest Rate Sensitivity




The table below provides information about the Companys financial instruments that are sensitive to changes in interest rates as
of September 30, 2005. For mortgage-backed securities, investment securities and borrowings, the table presents principal cash flows by expected
maturity dates.







|                                                                                                            |  |  |  | Within three months |         | Four to twelve months |  | More than one year to three years |          | More than three years to five years |      | Over five years |         | Total
|----------------------------------------------------------------------------------------------------------- |  |  |  | ------------------- | ------- | --------------------- |  | --------------------------------- | -------- | ----------------------------------- | ---- | --------------- | ------- | -----
|
|Interest-earning assets (1):                                                                                |  |  |  |                     |         |                       |  |                                   |          |                                     |      |                 |         |      
|Mortgage
loans (2):                                                                                         |  |  |  |                     |         |                       |  |                                   |          |                                     |      |                 |         |      
|Fixed
rate                                                                                                  |  |  |  | $                   | 61,737  |                       |  | $                                 | 185,214  |                                     |      | $               | 338,671 |      
|Adjustable
rate                                                                                             |  |  |  |                     | 305,405 |                       |  |                                   | 91,315   |                                     |      |                 | 248,371 |      
|Other loans
(2):                                                                                            |  |  |  |                     |         |                       |  |                                   |          |                                     |      |                 |         |      
|Fixed
rate                                                                                                  |  |  |  |                     | 25,086  |                       |  |                                   | 75,260   |                                     |      |                 | 40,678  |      
|Adjustable
rate                                                                                             |  |  |  |                     | 105,517 |                       |  |                                   | 1,477    |                                     |      |                 | 278     |      
|Mortgage-backed securities:                                                                                 |  |  |  |                     |         |                       |  |                                   |          |                                     |      |                 |         |      
|Fixed
rate                                                                                                  |  |  |  |                     | 17,876  |                       |  |                                   | 47,519   |                                     |      |                 | 117,297 |      
|Adjustable
rate                                                                                             |  |  |  |                     |        |                       |  |                                   |         |                                     |      |                 |        |      
|Investment
securities and other assets:                                                                     |  |  |  |                     | 66,171  |                       |  |                                   | 89,282   |                                     |      |                 | 29,293  |      
|Total                                                                                                       |  |  |  | $                   | 581,792 |                       |  | $                                 | 490,067  |                                     |      | $               | 774,588 |      
|Interest-bearing liabilities:                                                                               |  |  |  |                     |         |                       |  |                                   |          |                                     |      |                 |         |      
|Deposits
(3):                                                                                               |  |  |  |                     |         |                       |  |                                   |          |                                     |      |                 |         |      
|NOW
accounts                                                                                                |  |  |  | $                   | 15,451  |                       |  | $                                 | 46,354   |                                     |      | $               | 59,333  |      
|Passbook
accounts                                                                                           |  |  |  |                     | 27,755  |                       |  |                                   | 83,264   |                                     |      |                 | 62,170  |      
|Money market
accounts                                                                                       |  |  |  |                     | 47,103  |                       |  |                                   | 141,308  |                                     |      |                 | 45,219  |      
|Certificate
accounts                                                                                        |  |  |  |                     | 194,148 |                       |  |                                   | 516,491  |                                     |      |                 | 246,764 |      
|Borrowings
(4):                                                                                             |  |  |  |                     | 5,000   |                       |  |                                   |         |                                     |      |                 | 185,000 |      
|Total                                                                                                       |  |  |  | $                   | 289,457 |                       |  | $                                 | 787,417  |                                     |      | $               | 598,486 |      
|Excess
(deficiency) of interest earning assets over interest-bearing liabilities                            |  |  |  | $                   | 292,335 |                       |  | $                                 | (297,350 | )                                   |      | $               | 176,102 |      
|Cumulative
excess of interest-earning assets over interest-bearing liabilities                              |  |  |  | $                   | 292,335 |                       |  | $                                 | (5,015   | )                                   |      | $               | 171,087 |      
|Cumulative
excess of interest-earning assets over interest-bearing liabilities as a percent of total assets |  |  |  |                     | 9.71    | %                     |  | (0.17)%                           |          |                                     | 5.68 | %               |         |      






|(1) |  | Adjustable and floating rate assets are included in the period in
which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed rate assets are included in the periods in
which they are scheduled to be repaid based on scheduled amortization, in each case adjusted to reflect estimated prepayments. Estimated prepayment
statistics were obtained from averaged projections from various primary securities dealers. For fixed rate mortgages and mortgage-backed securities,
annual prepayment rates from 11% to 37%, based on the coupon rate, were used.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Balances have been reduced for loans in process and deferred loan
fees and discounts that aggregated to $282.6 million at September 30, 2005. Nonperforming loans aggregating $2.1 million were included in the
within three months repricing period. Balances include fixed rate loans held for sale of $10.7 million at September 30, 2005 which were
included in the periods in which they would be repaid based on scheduled amortization and estimated prepayments.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The Companys negotiable order of withdrawal
(NOW) accounts, passbook savings accounts and money market deposit accounts are generally subject to immediate withdrawal. However,
management considers a certain portion of these accounts to be core deposits having significantly longer effective maturities based on the
Companys retention of such deposit accounts in changing interest rate environments. NOW accounts, passbook savings accounts and money market
deposit accounts are assumed to be withdrawn at annual rates of 40%, 60% and 80%, respectively, of the declining balance of such accounts during the
period shown. Management believes the rates are indicative of expected withdrawal rates in a rising interest rate environment. If all of the
Companys NOW accounts, passbook savings accounts, and money market deposit accounts had been assumed to be subject to repricing within one year,
the cumulative one-year deficiency of interest-earning assets to interest-bearing liabilities would have been negative $218.8 million, or negative
7.27% of total assets.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------








20


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MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS


|(4) |  | Of the $595.5 million of borrowings, $445 million are callable on
specified dates during fiscal years 2006 through 2010 by the FHLB. Based on the interest rate environment that existed at September 30, 2005, it was
assumed that $100 million are called in the more than one to three year category and $130 million are called in the more than three to five year
category. The remaining $215 million are not expected to be called prior to maturity.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain shortcomings are inherent in the method of analysis
presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets,
such as adjustable rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate
increase.




The Company does not purchase, sell or enter into
derivative financial instruments or derivative commodity instruments as defined in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (Statement 133), except for commitments to originate mortgage loans that will be held for sale,
which the Company enters into in the normal course of business. The fair value of these commitments was not material to the Companys financial
results.




Interest Rate Risk




The Company uses a simulation model to quantify its
interest rate risk. The simulation model measures the sensitivity of asset and liability fair values to hypothetical changes in interest rates.
Interest rate sensitive instruments used in the computer model include: loans, mortgage-backed securities, investment securities, federal funds sold,
interest-bearing deposits in other banks, FHLB stock, deposits, advances from the FHLB, and off-balance sheet loan servicing rights and commitments.
The model calculates net present values for assets, liabilities and off-balance sheet contracts using a discounted cash flow methodology. These amounts
are netted together to determine net portfolio value. Management estimates discount rates by using current market yields on similar financial
instruments. Discount rates are adjusted upward and downward by 100 basis points and 200 basis points to reflect a hypothetical parallel shift in
interest rates. In addition, management estimates loan prepayment rates, deposit decay rates, and values of certain assets that could correspond with
such hypothetical parallel shifts in interest rates.




Presented below is an analysis of the Companys
interest rate risk at September 30, 2005 as calculated utilizing the Companys computer model. The table presents net portfolio value, dollar and
percent changes in net portfolio value, for instantaneous and parallel shifts in the yield curve in 100 basis point increments up and
down.







| |  |  |  | Change in rates |      | Net portfolio value amount |  | Dollar change |         | Percent change |  |  
| |  |  |  | --------------- | ---- | -------------------------- |  | ------------- | ------- | -------------- |  | -
|
|
| |  |  |  |                 | +200 | B.P.                       |  | $             | 405,836 |                |  | $
| |  |  |  |                 | +100 | B.P.                       |  | $             | 447,100 |                |  | $
| |  |  |  |                 | 0    | B.P.                       |  | $             | 467,571 |                |  | $
| |  |  |  |                 | 100 | B.P.                       |  | $             | 470,734 |                |  | $
| |  |  |  |                 | 200 | B.P.                       |  | $             | 447,504 |                |  | $



The Companys net portfolio value amount declines by 4.38% and 13.20%, respectively in a hypothetical 100 basis point and 200
basis point rise in interest rates. The net portfolio value decline results from the nature of the asset and liability mix. The Companys assets
consist of predominately long-term, fixed rate loans and mortgage-backed securities amounting to $1.682 billion at September 30, 2005. Of this amount,
$1.294 billion were loans and $388 million were mortgage-backed securities. These assets are funded primarily by interest bearing deposits and
borrowings totaling $2.196 billion at September 30, 2005. Interest bearing deposits amounted to $1.601 billion and borrowings totaled $595 million at
September 30, 2005. Interest bearing deposits and borrowings tend to be shorter-term in nature. Thus, during periods of rising interest rates, the
Companys long-term fixed rate assets can be expected to reprice more slowly than its interest bearing









2005 Annual Report




21


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MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




deposits and borrowings. This repricing difference
results in a reduction of net portfolio value in rising interest rate environments. Under declining interest rate environments, the Companys loan
customers may, under certain circumstances, have an economic incentive to refinance their loans at the prevailing hypothetical rate. Such loan
refinancing activity could result in a significantly shorter asset duration. Shorter asset duration in a declining interest rate environment could
result in a lower net portfolio amount. Therefore, given the low interest rate environment that existed at September 30, 2005, management believes that
net portfolio values are likely to be more adversely affected by rising interest rates than declining interest rates.




The preceding analysis was based on numerous assumptions
that management believes to be reasonable. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and market values of
certain assets under various interest rate scenarios. It was also assumed delinquency rates would not change as a result of changes in interest rates
although there can be no assurance that this will be the case. Even if interest rates change in the designated increments, there can be no assurance
that the Companys assets and liabilities would perform as indicated in the table above. Since there is no quoted market for most of the
Companys financial instruments, management has no basis to determine that values presented would be indicative of the amounts realized in an
actual negotiated sale. Furthermore, management has not considered the tax effect or transaction costs that may be associated with disposal of the
Companys assets and liabilities. A change in U.S. Treasury rates in the indicated amounts, accompanied by a change in the slope or shape of the
yield curve, could result in significantly different net portfolio values than shown above.




Analysis of Net Interest
Income




The Companys earnings primarily depend upon its net
interest income, which is the difference between interest income earned on its interest-earning assets and interest incurred on its interest-bearing
liabilities. Net interest income is affected by (i) the difference between rates of interest earned on the Companys interest-earning assets and
rates paid on its interest-bearing liabilities (interest rate spread) and (ii) the relative amounts of its interest-earning assets and
interest-bearing liabilities.




The following tables present an analysis of certain aspects
of the Companys operations during the periods indicated. The first table presents the average balances of, and the interest and dividends earned
or incurred on, each major class of interest-earning assets and interest-bearing liabilities. No tax equivalent adjustments were made. Average balances
represent daily average balances. The yields and costs include fees that are considered adjustments to yields.









22


---



MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS







|                                                        |  |  |  | Years ended September 30, |          
|------------------------------------------------------- |  |  |  | ------------------------- | ---------
|
|
|
|Assets:                                                 |  |  |  |                           |          
|Interest-earning assets (1):                            |  |  |  |                           |          
|Interest-bearing deposits                               |  |  |  | $                         | 46,454   
|Investment securities                                   |  |  |  |                           | 173,747  
|Mortgage-backed securities                              |  |  |  |                           | 442,793  
|Mortgage loans                                          |  |  |  |                           | 1,783,844
|Other
loans                                             |  |  |  |                           | 300,948  
|Total
interest-earning assets                           |  |  |  |                           | 2,747,786
|Total
noninterest-earning assets                        |  |  |  |                           | 118,338  
|Total
assets                                            |  |  |  | $                         | 2,866,124
|Liabilities and Stockholders Equity:                   |  |  |  |                           |          
|Interest-bearing liabilities:                           |  |  |  |                           |          
|Deposits:                                               |  |  |  |                           |          
|Transaction accounts                                    |  |  |  | $                         | 839,707  
|Passbook savings                                        |  |  |  |                           | 192,115  
|Official checks                                         |  |  |  |                           | 22,254   
|Certificate accounts                                    |  |  |  |                           | 897,684  
|Total
deposits                                          |  |  |  |                           | 1,951,760
|FHLB
advances                                           |  |  |  |                           | 575,926  
|Other
borrowings                                        |  |  |  |                           | 276      
|Total
interest-bearing liabilities                      |  |  |  |                           | 2,527,962
|Noninterest bearing liabilities                         |  |  |  |                           | 36,398   
|Total
liabilities                                       |  |  |  |                           | 2,564,360
|Stockholders equity                                    |  |  |  |                           | 301,764  
|Total
liabilities and stockholders equity              |  |  |  | $                         | 2,866,124
|Net
interest income/interest rate spread (2)            |  |  |  |                           |          
|Net
interest-earning assets/ net interest margin (3)    |  |  |  | $                         | 219,824  
|Interest-earning assets to interest-bearing liabilities |  |  |  |                           |          






|(1) |  | Average balances and rates include nonaccruing
loans.
|--- |  | -----------------------------------------------------

|(2) |  | Interest rate spread represents the difference between weighted
average interest rates earned on interest-earning assets and the weighted average interest rates paid on interest-bearing liabilities.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Net interest margin represents net interest income as a
percentage of average interest-earning assets.
|--- |  | ------------------------------------------------------------------------------------------------------



Rate/Volume Analysis




The relationship between the
volume and rates of the Companys interest-earning assets and interest-bearing liabilities influences the Companys net interest income. The
following table reflects the sensitivity of the Companys interest income and interest expense to changes in volume and in prevailing interest
rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on effects attributable to: (1) changes
in volume (changes in volume multiplied by old rate); (2) changes in rate (changes in rate multiplied by old volume); and (3) net change. Changes
attributable to the combined impact of volume and rates have been allocated proportionately to changes due to volume and changes due to
rate.









2005 Annual Report




23


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MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS












|                           |  |  |  |   |        | Years ended September 30,Increase (decrease) |  |   |       
|-------------------------- |  |  |  | - | ------ | -------------------------------------------- |  | - | ------
|
|
|
|Interest
income:           |  |  |  |   |        |                                              |  |   |       
|Interest-bearing deposits  |  |  |  | $ | 876    |                                              |  | $ | 141   
|Investment
securities      |  |  |  |   | (1,096 | )                                            |  |   | 320   
|Mortgage-backed securities |  |  |  |   | 302    |                                              |  |   | (555  
|Mortgage
loans             |  |  |  |   | 19,813 |                                              |  |   | (1,472
|Non-mortgage
loans:        |  |  |  |   |        |                                              |  |   |       
|Commercial
loans           |  |  |  |   | 1,018  |                                              |  |   | 423   
|Consumer
loans             |  |  |  |   | 2,377  |                                              |  |   | 653   
|Total
interest income      |  |  |  |   | 23,290 |                                              |  |   | (490  
|                           |  |  |  |   |        |                                              |  |   |       
|Interest
expense:          |  |  |  |   |        |                                              |  |   |       
|Deposits:                  |  |  |  |   |        |                                              |  |   |       
|Transaction
accounts       |  |  |  |   | 399    |                                              |  |   | 1,740 
|Passbook
savings           |  |  |  |   | 111    |                                              |  |   | 134   
|Certificate
accounts       |  |  |  |   | 2,176  |                                              |  |   | 2,492 
|Total
deposits             |  |  |  |   | 2,686  |                                              |  |   | 4,366 
|FHLB
advances              |  |  |  |   | 1,388  |                                              |  |   | 234   
|Other
borrowings           |  |  |  |   | (44    | )                                            |  |   | 9     
|Total
interest expense     |  |  |  |   | 4,030  |                                              |  |   | 4,609 
|                           |  |  |  |   |        |                                              |  |   |       
|Net interest
income        |  |  |  | $ | 19,260 |                                              |  | $ | (5,099



Results of Operations




Year Ended September 30, 2005 Compared to Year Ended September 30, 2004




General




Diluted earnings per share for the year ended September 30,
2005, increased 11.9% to $1.98 per share on net income of $46.2 million, compared to $1.77 per share on net income of $41.0 million for the same period
last year. The increase was due primarily to increased net interest income, resulting from an increase in average interest-earning assets due to
originations of loans. This growth was funded primarily with deposits and repayments of mortgage-backed securities. Net interest income increased 15.0%
to $108.8 million for the year ended September 30, 2005, compared to $94.7 million for the year ended September 30, 2004. This increase was due to an
increase in interest income of $22.8 million partially offset by an increase in interest expense of $8.6 million. Other income decreased to $23.4
million for the year ended September 30, 2005 from $23.5 million for the year ended September 30, 2004. Other expenses increased to $54.4 million for
the year ended September 30, 2005 from $49.9 million for the year ended September 30, 2004.




The two hurricanes that hit the Treasure Coast in September
2004 had a negative effect on the Companys earnings for the last fiscal quarter of 2004 and the first quarter of 2005 as a result of lower levels
of loan originations, loan sales and fee income. Included in gain on disposal of premises and equipment for the year ended September 30, 2005 was
approximately $563,000 of insurance proceeds received on hurricane damaged premises and equipment. Included in occupancy expense for the year ending
September 30, 2004 was approximately $146,000 of costs, not covered by insurance, related to damages to building and equipment due to the
storms.









24


---



MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Interest Income




Total interest income increased to $164.9 million for the
year ended September 30, 2005 from $142.1 million for the year ended September 30, 2004 as a result of an increase in average interest-earning assets
of $336.2 million to $2.7 billion for the year ended September 30, 2005 from $2.4 billion for the year ended September 30, 2004. The average rate
earned on interest-earning assets increased to 6.00% for the year ended September 30, 2005 from 5.89% for the year ended September 30, 2004, an
increase of 11 basis points. Interest income on loans increased $22.8 million to $142.0 million for the year ended September 30, 2005 from $119.2
million for the year ended September 30, 2004. The average balance on total loans increased to $2.1 billion from $1.7 billion for fiscal year ended
2004, primarily due to increased levels of loan originations, particularly in residential, consumer and commercial real estate loans. Interest income
on investment securities decreased $776,000 to $4.9 million for the year ended September 30, 2005 from $5.7 million for the year ended September 30,
2004. The average balance decreased to $173.7 million in 2005 from $219.5 million in 2004, due to sales, maturities and calls of investment securities.
The decrease in the average balance was partially offset by an increase in the average yield to 2.81% for the year ended September 30, 2005 from 2.58%
for the year ended September 30, 2004. Interest income on mortgage-backed securities decreased $253,000 to $16.9 million for the year ended September
30, 2005 from $17.2 million for the year ended September 30, 2004. The average yield on mortgage-backed securities decreased to 3.82% in fiscal year
2005 from 3.94% in fiscal year 2004. The decrease in yield was partially offset by an increase in average balances of $7.9 million to $442.8 million
for the year ended September 30, 2005. These securities will continue to provide future monthly principal and interest repayment cash flow to fund loan
growth and other investment alternatives. Other interest income, mainly consisting of interest from interest-bearing deposits in other banks, increased
to $1.1 million for the year ended September 30, 2005 from $100,000 for the year ended September 30, 2004. This increase was primarily due to an
increase in average balance to $46.5 million in 2005 from $10.0 million in 2004, as well as an increase in the yield to 2.40% from 1.00% in prior year.
The increase in the average balance of interest-bearing deposits was primarily due to an increase in overnight funds on deposit at the
FHLB.




Interest Expense




Total interest expense increased to $56.1 million for the
year ended September 30, 2005 from $47.4 million for the year ended September 30, 2004. This increase was due to an increase in the average rate
incurred on interest-bearing liabilities to 2.22% for the year ended September 30, 2005 from 2.16% for the year ended September 30, 2004. The average
balance of interest-bearing liabilities increased $328.3 million to $2.5 billion for the year ended September 30, 2005 from $2.2 billion for the year
ended September 30, 2004. Interest expense on deposits increased $7.1 million to $30.8 million for the year ended September 30, 2005 from $23.7 million
for the year ended September 30, 2004. This increase was primarily a result of a increase in the average rate paid on deposits to 1.58% for the year
ended September 30, 2005 from 1.43% for the year ended September 30, 2004, as well as an increase of $288.3 million in the average balance to $2.0
billion in 2005 from $1.7 billion in 2004. The average deposit mix changed to 54.0% and 46.0% of core deposits and certificate accounts, respectively,
for the year ended September 30, 2005 from 50.3% and 49.7%, respectively, for the same period in 2004. Interest expense on FHLB advances increased $1.6
million to $25.3 million for the year ended September 30, 2005 from $23.7 million for the year ended September 30, 2004. This increase was primarily
the result of an increase of $40.5 million in the average balance of FHLB advances to $575.9 million for the year ended September 30, 2005 from $535.4
million for the year ended September 30, 2004. The increase in average balance was primarily due to proceeds from new long-term fixed rate advances
taken in order to fund the origination of fixed rate loans.




The net interest margin increased to 3.96% for the year
ended September 30, 2005 from 3.93% for the year ended September 30, 2004. This increase was due to the yield on interest earning assets increasing
more than the cost of interest bearing liabilities in the rising interest rate environment.




Provision for Loan Losses




The determination of the allowance for loan losses, which
is considered by management to be a critical accounting policy, is based upon estimates made by management. Critical accounting policies are defined as
policies that are material to the portrayal of the Companys financial condition and results of operations, and that require managements
most difficult, subjective, or complex judgements. The Companys financial results could differ significantly if different judgements or estimates
are applied in the application of these policies.









2005 Annual Report




25


---



MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




The provision for loan losses was $1.9 million for the year
ended September 30, 2005, compared to $1.7 million for the year ended September 30, 2004. The provision for loan losses for the year ended September
30, 2005 was principally comprised of a charge of $1.7 million due to increased credit risk resulting from growth in the loan portfolio, primarily in
the commercial real estate and consumer loan portfolios, $278,000 related to an increase in the level of classified loans partially offset by $31,000
in net recoveries. The provision for loan losses for the year ended September 30, 2004 was principally comprised of a charge of $2.0 million due to
increased credit risk resulting from growth in the loan portfolio, primarily in the commercial real estate, commercial business and consumer loan
portfolios, $49,000 in net charge offs partially offset by a credit of $355,000 related to a decrease in the level of classified loans. The allowance
for loan losses was $19.7 million and $17.8 million for September 30, 2005 and 2004, respectively, representing .87% and .94% of total loans at
September 30, 2005 and 2004, respectively. The allowance was 459.55% and 383.37% of classified loans at September 30, 2005 and 2004, respectively.
Nonperforming loans decreased to $2.2 million at September 30, 2005 from $3.0 million at September 30, 2004. The ratio of the allowance to total
nonperforming loans increased to 904.99% at September 30, 2005 from 587.20% at September 30, 2004.




Other Income




Other income decreased $108,000 to $23.4 million for the
year ended September 30, 2005 from $23.5 million for the year ended September 30, 2004. This decrease was due primarily to decrease of $2.2 million in
gain on sale of securities, partially offset by increases of $1.8 million in fees and service charges and $466,000 in gain on disposal of premises and
equipment. Fees and service charges, primarily from fees and service charges on deposit products, were $16.7 million and $14.9 million for the years
ended September 30, 2005 and 2004, respectively. This increase was due primarily to the growth in transaction accounts. Income from real estate
operations was $215,000 and $410,000 for the years ended September 30, 2005 and 2004, respectively. The decrease was primarily due to a reduction in
gains on sale of real estate acquired in settlement of loans through foreclosure in the year ended September 30, 2004. Insurance commissions and fees
were $3.2 million and $3.4 million for the years ended September 30, 2005 and 2004, respectively. This decrease was due primarily to a decrease in
sales of fixed rate annuities. Gain on sale of mortgage loans was $2.3 million for the years ended September 30, 2005 and 2004, respectively. The
Company sells loans in order to reduce interest rate risk by limiting the growth of long-term fixed rate loans held in its portfolio. Gain on sale of
premises and equipment increased to $800,000 for the year ended September 30, 2005 from $334,000 for the year ended September 30, 2004. This increase
was due primarily to insurance proceeds received on hurricane damaged premises and equipment. Gain on the sale of debt and equity securities was
$41,000 and $2.2 million for the years ended September 30, 2005 and 2004, respectively. The decrease was primarily due to the sale of equity securities
in the year ended September 30, 2004.




Other Expense




Other expense increased by $4.5 million to $54.4 million
for the year ended September 30, 2005 from $49.9 million for the year ended September 30, 2004. The increase was due primarily to increases of $2.6
million in compensation and benefits, $791,000 in occupancy expense, and $714,000 in professional fees. The increase in compensation and benefits was
due primarily to annual salary increases, additional staff required to support the growth in loans and deposits, and increased contributions to the
multi-employer defined benefit plan. The increase in occupancy expense was due primarily to an increase in expenses incurred in the opening of new
branches. Professional fees increased due to additional expense related to compliance with the Sarbanes-Oxley act of 2002 and the Bank Secrecy Act.
Data processing services and advertising and promotion increased $313,000 and $366,000, respectively, due primarily to the opening of new branches and
the growth in loans and deposits. Other expense decreased $233,000 primarily due to a $505,000 accrual established in fiscal year 2004 based on the
settlement of an issue with the Internal Revenue Service (IRS) related to the Companys Employee Stock Ownership Plan (ESOP).




Income Taxes




Income tax expense increased $4.1 million to $29.7 million
for the year ended September 30, 2005 from $25.7 million for the year ended September 30, 2004, due primarily to an increase in pretax accounting
income. The effective tax rate was 39.2% and 38.5% for the years ended September 30, 2005 and 2004, respectively. The increase in the effective tax
rate for the year was primarily a result of a tax benefit derived in the prior year from the settlement with the IRS concerning the
ESOP.









26


---



MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Year Ended September 30, 2004 Compared to Year Ended
September 30, 2003




General




Diluted earnings per share for the year ended September 30,
2004, increased 7.9% to $1.77 per share on net income of $41.0 million, compared to $1.64 per share on net income of $37.9 million for the same period
last year. The increase was due primarily to increased net interest income, resulting from an increase in average interest-earning assets due to
originations of loans and purchases of mortgage-backed securities. This growth was funded with low cost core deposits and FHLB advances. Net interest
income increased 11.1% to $94.7 million for the year ended September 30, 2004, compared to $85.2 million for the year ended September 30, 2003. This
increase was due to an increase in interest income of $7.2 million and a decrease in interest expense of $2.2 million. Other income increased to $23.5
million for the year ended September 30, 2004 from $21.8 million for the year ended September 30, 2003. Other expenses increased to $49.9 million for
the year ended September 30, 2004 from $43.0 million for the year ended September 30, 2003.




The two hurricanes that hit the Treasure Coast in September
2004 had a negative effect on the Companys earnings for the last fiscal quarter as a result of lower levels of loan originations, loan sales and
fee income. Included in occupancy expense for the year ending September 30, 2004 was approximately $146,000 of costs, not covered by insurance, related
to damages to building and equipment due to the storms.




Interest Income




Total interest income increased to $142.1 million for the
year ended September 30, 2004 from $134.9 million for the year ended September 30, 2003 as a result of an increase in average interest-earning assets
of $295.6 million to $2.4 billion for the year ended September 30, 2004 from $2.1 billion for the year ended September 30, 2003. The average rate
earned on interest-earning assets decreased to 5.89% for the year ended September 30, 2004 from 6.38% for the year ended September 30, 2003, a decrease
of 49 basis points. Interest income on loans increased $3.0 million to $119.2 million for the year ended September 30, 2004 from $116.2 million for the
year ended September 30, 2003. This increase was a result of a $168.4 million increase in the average balance to $1.7 billion in 2004 from $1.6 billion
in 2003, partially offset by a decrease in average yield. The average yield on loans decreased to 6.82% for the year ended September 30, 2004 from
7.36% for the year ended September 30, 2003. The increase in the average balance of total loans was mainly due to significant growth in the commercial
real estate, consumer and residential loan portfolios resulting from increased levels of loan originations. Interest income on investment securities
decreased $3.1 million to $5.7 million for the year ended September 30, 2004 from $8.7 million for the year ended September 30, 2003. This decrease was
primarily due to a decrease in the average balance to $219.5 million in 2004 from $301.3 million in 2003, and a decrease in the average yield to 2.58%
for the year ended September 30, 2004 from 2.90% for the year ended September 30, 2003. The decrease in the average balance of investment securities
was primarily due to the maturity, call and sale of investment securities. Interest income on mortgage-backed securities increased $7.9 million to
$17.2 million for the year ended September 30, 2004 from $9.2 million for the year ended September 30, 2003. This increase was primarily due to an
increase in the average balance of mortgage-backed securities to $434.9 million in 2004 from $180.3 million in 2003. This increase was partially offset
by a decrease in average yield on mortgage-backed securities to 3.94% in 2004 from 5.13% in 2003. The Companys investment strategy has been to
shift the portfolio from lower yielding, shorter-term investment securities into higher yielding balloon mortgage-backed securities, with expected
average lives of three to four years. These securities will provide future monthly principal and interest repayment cash flow to fund loan growth and
other investment alternatives. Other interest income, mainly consisting of interest from interest-bearing deposits in other banks, decreased by
$612,000 to $100,000 for the year ended September 30, 2004 from $712,000 for the year ended September 30, 2003. This decrease was primarily due to a
decrease in the average balance to $10.0 million in 2004 from $55.6 million in 2003, as well as a decrease in the yield to 1.00% for the year ended
September 30, 2004 from 1.28% for the year ended September 30, 2003. The decrease in the average balance of interest-bearing deposits was primarily due
to a decrease in overnight funds on deposit at the FHLB.




Interest Expense




Total interest expense decreased to $47.4 million for the
year ended September 30, 2004 from $49.7 million for the year ended September 30, 2003. This decrease was due primarily to a decrease in the average
rate incurred on interest-bearing liabilities to 2.16% for the year ended September 30, 2004 from 2.60% for the year ended September 30, 2003, a
decrease









2005 Annual Report




27


---



MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




of 44 basis points. This decrease was partially offset
by an increase in average interest-bearing liabilities to $2.2 billion for the year ended September 30, 2004 from $1.9 billion for the year ended
September 30, 2003. Interest expense on deposits decreased $3.6 million to $23.7 million for the year ended September 30, 2004 from $27.3 million for
the year ended September 30, 2003. This decrease was primarily a result of a decrease of 45 basis points in the average rate to 1.43% for the year
ended September 30, 2004 from 1.88% for the year ended September 30 2003. This decrease was partially offset by a $210.6 million increase in the
average balance to $1.7 billion in 2004 from $1.5 billion in 2003. The average deposit mix changed to 50.3% and 49.7% of core deposits and certificate
accounts, respectively, for the year ended September 30, 2004 from 43.9% and 56.1%, respectively, for the same period in 2003. Interest expense on FHLB
advances and other borrowings increased $1.3 million to $23.7 million for the year ended September 30, 2004 from $22.4 million for the year ended
September 30, 2003. This increase was the result of an increase of $78.1 million in the average balance of FHLB advances to $535.4 million in 2004 from
$457.3 million in 2003, partially offset by a decrease in average rate on FHLB advances to 4.42% in 2004 from 4.89% in 2003. The increase in average
balance was primarily due to proceeds from new long-term fixed rate advances taken in order to fund the origination of fixed rate loans and the
purchase of mortgage-backed securities.




The net interest margin decreased to 3.93% for the year
ended September 30, 2004 from 4.03% for the year ended September 30, 2003. This decrease was due to the yield on interest earning assets decreasing
more than the cost of interest bearing liabilities in the declining interest rate environment.




Provision for Loan Losses




The determination of the allowance for loan losses, which
is considered by management to be a critical accounting policy, is based upon estimates made by management. Critical accounting policies are defined as
policies that are material to the portrayal of the Companys financial condition and results of operations, and that require managements
most difficult, subjective, or complex judgments. The Companys financial results could differ significantly if different judgments or estimates
are applied in the application of these policies.




The provision for loan losses was $1.7 million for the year
ended September 30, 2004, compared to $1.9 million for the year ended September 30, 2003. The provision for loan losses for the year ended September
30, 2004 was principally comprised of a charge of $2.0 million due to increased credit risk resulting from growth in the loan portfolio, primarily in
the commercial real estate, commercial business and consumer loan portfolios, $49,000 in net charge offs partially offset by a credit of $355,000
related to a decrease in the level of classified loans. The provision for loan losses for the year ended September 30, 2003 was principally comprised
of a charge of $2.1 million due to increased credit risk resulting from growth in the loan portfolio, primarily in the commercial real estate,
commercial business and consumer loan portfolios, $124,000 in net charge offs partially offset by a credit of $253,000 related to a decrease in the
level of classified loans. The allowance for loan losses was at $17.8 million and $16.2 million for September 30, 2004 and 2003, respectively. The
allowance was .94% and 1.01% of total loans at September 30, 2004 and 2003, respectively and was 383.37% and 245.6% of classified loans at September
30, 2004 and 2003, respectively. Nonperforming loans increased to $3.0 million at September 30, 2004 from $2.2 million at September 30, 2003. The ratio
of the allowance for loan losses to total nonperforming loans decreased to 587.20% at September 30, 2004 from 731.3% at September 30,
2003.




Other Income




Other income increased $1.8 million to $23.6 million for
the year ended September 30, 2004 from $21.8 million for the year ended September 30, 2003. This increase was due primarily to increases of $1.9
million in fees and service charges, $694,000 in gain on sale of equity securities, $623,000 in insurance commissions and fees and $353,000 in gain on
sale of premises, partially offset by a $1.9 million decrease in the gain on sale of mortgage loans. Fees and service charges, primarily from fees and
service charges on deposit products, were $14.9 million and $13.0 million for the years ended September 30, 2004 and 2003, respectively. This increase
was due primarily to the growth in transaction accounts. Gain on the sale of equity securities was $1,997,000 and $1,303,000 for the years ended
September 30, 2004 and 2003, respectively. Insurance commissions and fees were $3.4 million and $2.8 million for the years ended September 30, 2004 and
2003, respectively. This increase was due primarily to fees from the sale of fixed rate annuities and insurance products. The Company completed its
acquisition of an additional insurance agency during March 2003 (See Note 17 to consolidated financial statements.) Gain on sale of mortgage loans was
$2.3 million and $4.2 million for the years ended September 30,









28


---



MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




2004 and 2003, respectively. This decrease was due to a
decline in the originations of fixed rate residential one-to-four family mortgage loans partly as a result of a change in customer preference to
adjustable rate loans. Total fixed rate residential loan originations for the year ended September 30, 2004 decreased by $122.6 million; however,
adjustable rate loan originations increased by $167.5 million. The Company sells loans in order to reduce interest rate risk by limiting the growth of
long-term fixed rate loans held in its portfolio. Income from real estate operations was $410,000 and $213,000 for the years ended September 30, 2004
and 2003, respectively. This increase was primarily due to gains on sale of real estate acquired in settlement of loans through foreclosure. Gain on
the sale of debt securities was $248,000 and $361,000 for the years ended September 30, 2004 and 2003, respectively. Securities were sold for
diversification and risk management purposes.




Other Expense




Other expense increased by $6.9 million to $49.9 million
for the year ended September 30, 2004 from $43.0 million for the year ended September 30, 2003. The increase was due primarily to increases of $3.5
million in compensation and benefits, $962,000 in occupancy expense, $501,000 in data processing services, $275,000 in advertising and promotion and
$1,556,000 in other expenses. The increase in compensation and benefits was due primarily to annual salary increases, additional staff required to
support the growth in loans and deposits, and increased contributions to the multi-employer defined benefit plan. The increase in occupancy expense was
due primarily to an increase in data processing equipment expense and expenses incurred in the opening of new branches. The increases in data
processing services and advertising and promotion were due primarily to increases resulting from the growth in loans and deposits. The increase in
other expense was due to a $328,000 increase in professional fees, $251,000 increase in deposit account losses, and $878,000 increase in other
expenses. Included in other expenses was the recognition of a $505,000 non-deductible amount paid to the IRS under a settlement agreement related to an
operational adjustment in the Companys Employee Stock Ownership Plan (ESOP).




Income Taxes




Income tax expense increased by $1.5 million to $25.7
million for the year ended September 30, 2004 from $24.2 million for the year ended September 30, 2003, due primarily to an increase in pretax
accounting income. The effective tax rate was 38.5% and 39.0% for the years ended September 30, 2004 and 2003, respectively. The decrease in the
effective tax rate for the year was primarily a result of a tax benefit resulting from the IRS settlement concerning the ESOP.




Liquidity and Capital
Resources




The Banks primary sources of funds are deposits,
amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings
and funds provided from operations. The Bank will consider increasing its borrowings from the FHLB of Atlanta from time to time as an alternative to
growing deposits by increasing deposit account interest rates. In addition, the Bank holds unpledged fixed and adjustable rate mortgage-backed
securities totaling $351.6 million at September 30, 2005 that could be used as collateral under repurchase transactions with securities dealers.
Repurchase transactions serve as secured borrowings and provide a source of short-term liquidity for the Bank. At September 30, 2005, the Bank had $1.0
billion or 50.0% of the Banks deposits in certificate accounts. Based on past experience, management believes that a substantial percentage of
these certificates will be renewed at maturity, although there can be no assurance that this will occur. The Bank would use borrowings from the FHLB or
repurchase transactions with securities dealers if replacement funding was needed as a result of maturing certificate accounts.




Net cash flows from the Companys operating activities
(i.e. cash items affecting net income) was $41.4 million, $52.2 million, and $53.1 million for the years ended September 30, 2005, 2004, and 2003,
respectively. The decrease in cash flows in 2005 was due primarily to a decrease of $12.2 million in income taxes payable.




Net cash flows from the Companys investing activities
(i.e. cash used primarily from its investment securities, mortgage-backed securities and loan portfolios) was $353.5 million, $265.3 million, and
$359.0 million for the years ended September 30, 2005, 2004 and 2003, respectively. The increase in cash used for investing activities in 2005 was due
primarily to a decrease of $153.6 million in sales, maturities and calls of investment securities, a $105.3 million increase in the change in net
loans, an increase of $10.0 million in the purchase of investment securities, partially offset by a $179.5 decrease in the purchase of mortgage-backed
securities. The decrease in cash used for investing activities in 2004 was due primarily to a decrease of $291.1 million in the purchase of investment
securities, a decrease of $11.8 million in principal repayments









2005 Annual Report




29


---



MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




of mortgage-backed securities partially offset by a
$207.6 million increase in the change in net loans and a net increase of $20.0 million in the maturity and calls of investment
securities.




Net cash flows from the Companys financing activities
(i.e. cash receipts primarily from net increases (decreases) in deposits and net FHLB advances) was $342.1 million, $228.3 million, and $218.5 million
for the years ended September 30, 2005, 2004, and 2003, respectively. The increase in cash flows in 2005 was due primarily to an increase of $116.9
million in the net increase in deposits. The increase in cash flows in 2004 was due primarily to an increase of $17.2 million in the net increase in
deposits and $3.9 million decrease in the purchase of treasury stock partially offset by an decrease of $8.0 million in net proceeds from FHLB
advances.




The Banks liquid assets consist primarily of
investment securities and cash. At September 30, 2005, the Bank had liquid assets of $233.8 million, with loan commitments of $197.4 million
(consisting of unused lines of credit to homebuilders and residential and commercial loan commitments), letters of credit of $21.3 million and unfunded
loans in process of $271.0 million (the latter consisting primarily of residential loans in process). In addition, the Bank had certain investments in
mortgage-backed securities aggregating $388.5 million. The Bank intends to hold such investments in mortgage-backed securities until maturity. However,
these investments may be used as collateral for borrowing as need arises.




Harbor Florida Bancshares, Inc. (the holding company) has
cash requirements to pay dividends to shareholders and the holding companys expenses. During 2005, the holding company expended $17.9 million for
dividends and operating costs. As of September 30, 2005, the holding company had $6.2 million in cash. Additionally, the holding company was eligible
to receive dividends from the Bank in order to meet future cash requirements. Management believes that sufficient financial resources exist at the
holding company level to meet obligations for the next twelve months. As of September 30, 2005, $107.7 million was available for distribution from the
Bank to the holding company without further regulatory approval.




Stockholders equity increased to $320.5 million at
September 30, 2005, from $286.6 million at September 30, 2004. The increase was due primarily to $46.2 million of earnings for the fiscal year
partially offset by $17.3 million of dividends paid.




On October 9, 2002, the Companys Board of Directors
approved a new stock repurchase plan permitting the Company to acquire up to 1,200,000 shares of common stock. This stock repurchase plan was extended
on October 14, 2005 to continue until October 13, 2006. During 2005, the Company repurchased 18,370 shares at an average price of $36.15 per share. The
stock repurchase plan was one of the tools the Company used to manage the level of its capital.




The Company has a non-contributory defined benefit pension
plan (the Pension Plan) covering all full-time employees who were hired before January 1, 2003 and have attained one year of service and 21
years of age. The Pension Plan is part of a multi-employer plan and separate actuarial evaluations are not made for each employer nor are plan assets
so segregated. The Company elected to freeze the Pension Plan effective June 30, 2004 and, as a result, expects to be required to contribute
approximately $2.0 million for fiscal year 2006.




Contractual Obligations




The following table shows the aggregated amounts at
September 30, 2005 of payments due under specified contractual obligations, aggregated by category of contractual obligation, for specified time
periods:







|                     |  |  |  | Within one year |        | One through three years |  | Three through five years |        | More than five years |  | Total
|-------------------- |  |  |  | --------------- | ------ | ----------------------- |  | ------------------------ | ------ | -------------------- |  | -----
|
|                    
|FHLB
advances        |  |  |  | $               | 5,000  |                         |  | $                        | 85,000 |                      |  | $    
|Operating
leases     |  |  |  |                 | 292    |                         |  |                          | 334    |                      |  |      
|Purchase
obligations |  |  |  |                 | 5,662  |                         |  |                          | 2,678  |                      |  |      
|Total                |  |  |  | $               | 10,954 |                         |  | $                        | 88,012 |                      |  | $    








30


---



MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS




The Company expects to contribute an additional $2.0
million for fiscal year 2006 for its non-contributory defined benefit pension plan. The Company also has an unfunded supplemental executive retirement
plan for the benefit of Michael J. Brown, Sr. The liability related to this plan was $1.7 million as of September 30, 2005.




New Accounting
Pronouncements




In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised), Share-Based Payments (Statement 123R). This statement, which supersedes Accounting
Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees (APB 25), would eliminate the ability to account
for share-based compensation transactions using APB 25 and require all share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. The provision of Statement 123R will be effective for options vesting after
September 30, 2005 and is expected to result in approximately $425,000 to $475,000 additional expense, net of tax, in fiscal year
2006.




In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections (Statement 154), which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements  An Amendment of APB 28. Statement 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. It applies to all voluntary changes in accounting principle and to changes required
by an accounting pronouncement that does not include specific transition provisions. This statement requires retrospective application to prior period
financial statements of changes in accounting principle, unless it is impractical to determine either the period-specific or cumulative effects of the
change. Statement 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The adoption of this standard is not
expected to have a material impact on the Companys financial statements.




In November 2005, the FASB issued Staff Position (FSP) No.
FAS 115-1 and FAS 124-1, The Meaning of Other Than Temporary Impairment and its Application to Certain Investments (FSP 115-1).
FSP 115-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the
measurement of the impairment loss. It is effective for periods beginning after December 15, 2005 with earlier application permitted. Implementation of
this guidance is not expected to have a material impact on the companys financial statements.









2005 Annual Report




31


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This page intentionally left blank.









32


---



REPORT OF MANAGEMENTS ASSESSMENT OFEFFECTIVENESS OFINTERNAL
CONTROL OVER FINANCIAL REPORTING









Management of the Company is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934
as amended. The Companys internal controls over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




Under the supervision and with the participation of
management, including the principal executive officer and principal financial officer, management has assessed the effectiveness of the Companys
internal control over financial reporting as of the end of the period covered by this report. In making its assessment of internal control over
financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission
in Internal Control  Integrated Framework.




Managements assessment included an evaluation of the
design of the Companys internal control over financial reporting and testing of the operational effectiveness of its internal controls over
financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.




Based on this assessment, management determined that, as of
September 30, 2005, the Company maintained effective internal control over financial reporting based on the criteria established in Internal Control
 Integrated Framework.




The Companys independent registered public accounting
firm, KPMG, LLP, has issued an attestation report on managements assessment of the Companys internal control over financial reporting.




Michael J. Brown, Sr.President and Chief Executive
Officer




H. Michael CallahanChief Financial
Officer









2005 Annual Report




33


---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM














450 East Las Olas Boulevard, Suite 750 Ft. Lauderdale, Florida 33301




The Board of Directors and Stockholders Harbor Florida
Bancshares, Inc. and subsidiaries:




We have audited the accompanying statements of financial
condition of Harbor Florida Bancshares, Inc. and subsidiaries as of September 30, 2005 and 2004, and the related consolidated statements of earnings,
stockholders equity and comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 2005. We also
have audited managements assessment, included in the accompanying Report of Managements Assessment of Effectiveness of Internal Control
over Financial Reporting, that Harbor Florida Bancshares, Inc. and subsidiaries maintained effective internal control over financial reporting as of
September 30, 2005, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Harbor Florida Bancshares, Inc.s management is responsible for these consolidated financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on managements assessment, and an
opinion on the effectiveness of the Companys internal control over financial reporting based on our audits.




We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.




A companys internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and









34


---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM




expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial
statements.




Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.




In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial position of Harbor Florida Bancshares, Inc. and subsidiaries as of September
30, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2005, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, managements assessment that Harbor Florida Bancshares, Inc.
and subsidiaries maintained effective internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects,
based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Furthermore, in our opinion, Harbor Florida Bancshares, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).









Fort Lauderdale, Florida December 5, 2005









2005 Annual Report




35


---



CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION




September 30, 2005 and
2004







|                                                                                                                                                                                                                    |  |  |  | 2005 |           | 2004
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | --------- | ----
|
|Assets:                                                                                                                                                                                                             |  |  |  |      |           |     
|Cash and amounts
due from depository institutions                                                                                                                                                                   |  |  |  | $    | 81,245    |     
|Interest-bearing
deposits in other banks                                                                                                                                                                            |  |  |  |      | 23,689    |     
|Investment
securities held to maturity (estimated market value of $316 and $477 at September 30, 2005 and 2004, respectively)                                                                                       |  |  |  |      | 285       |     
|Investment
securities available for sale at estimated market value                                                                                                                                                  |  |  |  |      | 128,586   |     
|Mortgage-backed
securities held to maturity (estimated market value of $379,860 and $441,551 at September 30, 2005 and 2004, respectively)                                                                          |  |  |  |      | 388,458   |     
|Loans held for
sale (estimated market value of $10,880 and $2,492 at September 30, 2005 and 2004, respectively)                                                                                                     |  |  |  |      | 10,695    |     
|Loans,
net                                                                                                                                                                                                          |  |  |  |      | 2,275,861 |     
|Accrued interest
receivable                                                                                                                                                                                         |  |  |  |      | 12,591    |     
|Premises and
equipment, net                                                                                                                                                                                         |  |  |  |      | 51,286    |     
|Federal Home
Loan Bank stock (at cost)                                                                                                                                                                              |  |  |  |      | 32,411    |     
|Goodwill                                                                                                                                                                                                            |  |  |  |      | 3,591     |     
|Other
assets                                                                                                                                                                                                        |  |  |  |      | 3,487     |     
|Total
assets                                                                                                                                                                                                        |  |  |  | $    | 3,012,185 |     
|                                                                                                                                                                                                                   
|Liabilities and Stockholders Equity:                                                                                                                                                                               |  |  |  |      |           |     
|Liabilities:                                                                                                                                                                                                        |  |  |  |      |           |     
|Deposits                                                                                                                                                                                                            |  |  |  | $    | 2,056,307 |     
|Short-term
borrowings                                                                                                                                                                                               |  |  |  |      | 5,000     |     
|Long-term
debt                                                                                                                                                                                                      |  |  |  |      | 590,473   |     
|Advance
payments by borrowers for taxes and insurance                                                                                                                                                               |  |  |  |      | 31,440    |     
|Income taxes
payable                                                                                                                                                                                                |  |  |  |      | 665       |     
|Other
liabilities                                                                                                                                                                                                   |  |  |  |      | 7,789     |     
|Total
liabilities                                                                                                                                                                                                   |  |  |  |      | 2,691,674 |     
|Stockholders Equity:                                                                                                                                                                                               |  |  |  |      |           |     
|Preferred
stock; $.10 par value; authorized 10,000,000 shares; none issued and outstanding                                                                                                                          |  |  |  |      |          |     
|Common stock;
$.10 par value; authorized 70,000,000 shares; 31,999,140 shares issued and 23,976,958 outstanding at September 30, 2005 and 31,793,040 shares issued
and 23,789,228 outstanding at September 30, 2004 |  |  |  |      | 3,200     |     
|Paid-in
capital                                                                                                                                                                                                     |  |  |  |      | 208,024   |     
|Retained
earnings                                                                                                                                                                                                   |  |  |  |      | 228,938   |     
|Accumulated
other comprehensive loss, net                                                                                                                                                                           |  |  |  |      | (1,052    | )   
|Common stock
purchased by:                                                                                                                                                                                          |  |  |  |      |           |     
|Employee
stock ownership plan (ESOP)                                                                                                                                                                                |  |  |  |      | (8,555    | )   
|Recognition
and retention plan (RRP)                                                                                                                                                                                |  |  |  |      | (1,681    | )   
|Treasury
stock, at cost, 8,022,182 shares and 8,003,812 shares at September 30, 2005 and 2004, respectively                                                                                                         |  |  |  |      | (108,363  | )   
|Total
stockholders equity                                                                                                                                                                                          |  |  |  |      | 320,511   |     
|Total
liabilities and stockholders equity                                                                                                                                                                          |  |  |  | $    | 3,012,185 |     



See accompanying notes to consolidated financial
statements.









36


---



CONSOLIDATED STATEMENTS OF
EARNINGS




Years ended September 30, 2005, 2004 and
2003







|                                                    |  |  |  | 2005 |         | 2004 |  | 2003
|--------------------------------------------------- |  |  |  | ---- | ------- | ---- |  | ----
|
|Interest income:                                    |  |  |  |      |         |      |  |     
|Loans                                               |  |  |  | $    | 141,979 |      |  | $   
|Investment
securities, principally taxable interest |  |  |  |      | 4,888   |      |  |     
|Mortgage-backed securities                          |  |  |  |      | 16,901  |      |  |     
|Other                                               |  |  |  |      | 1,117   |      |  |     
|Total
interest income                               |  |  |  |      | 164,885 |      |  |     
|                                                    |  |  |  |      |         |      |  |     
|Interest expense:                                   |  |  |  |      |         |      |  |     
|Deposits                                            |  |  |  |      | 30,776  |      |  |     
|Borrowings
and debt                                 |  |  |  |      | 25,289  |      |  |     
|Total
interest expense                              |  |  |  |      | 56,065  |      |  |     
|Net interest
income                                 |  |  |  |      | 108,820 |      |  |     
|                                                    |  |  |  |      |         |      |  |     
|Provision for loan losses                           |  |  |  |      | 1,915   |      |  |     
|Net interest
income after provision for loan losses |  |  |  |      | 106,905 |      |  |     
|                                                    |  |  |  |      |         |      |  |     
|Other income:                                       |  |  |  |      |         |      |  |     
|Fees and
service charges                            |  |  |  |      | 16,718  |      |  |     
|Insurance
commissions and fees                      |  |  |  |      | 3,237   |      |  |     
|Income from
real estate operations                  |  |  |  |      | 215     |      |  |     
|Gain on sale
of mortgage loans                      |  |  |  |      | 2,289   |      |  |     
|Gain (loss)
on disposal of premises and equipment   |  |  |  |      | 800     |      |  |     
|Gain on sale
of equity securities                   |  |  |  |      |        |      |  |     
|Gain on sale
of debt securities                     |  |  |  |      | 41      |      |  |     
|Other                                               |  |  |  |      | 139     |      |  |     
|Total other
income                                  |  |  |  |      | 23,439  |      |  |     
|                                                    |  |  |  |      |         |      |  |     
|Other expenses:                                     |  |  |  |      |         |      |  |     
|Compensation
and employee benefits                  |  |  |  |      | 31,773  |      |  |     
|Occupancy                                           |  |  |  |      | 7,823   |      |  |     
|Data
processing services                            |  |  |  |      | 3,840   |      |  |     
|Advertising
and promotion                           |  |  |  |      | 2,038   |      |  |     
|Professional
fees                                   |  |  |  |      | 1,734   |      |  |     
|Other                                               |  |  |  |      | 7,191   |      |  |     
|Total other
expense                                 |  |  |  |      | 54,399  |      |  |     
|                                                    |  |  |  |      |         |      |  |     
|Income before
income taxes                          |  |  |  |      | 75,945  |      |  |     
|Income tax
expense                                  |  |  |  |      | 29,749  |      |  |     
|Net
income                                          |  |  |  | $    | 46,196  |      |  | $   
|                                                    |  |  |  |      |         |      |  |     
|Net income
per share:                               |  |  |  |      |         |      |  |     
|Basic                                               |  |  |  | $    | 2.03    |      |  | $   
|Diluted                                             |  |  |  | $    | 1.98    |      |  | $   



See accompanying notes to consolidated financial
statements.









2005 Annual Report




37


---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITYAND COMPREHENSIVE INCOME




Years ended September 30, 2005, 2004 and
2003







|                                       |  |  |  | Comprehensiveincome |        | Commonstock |  | Paid-incapital |       | Retained earnings
|-------------------------------------- |  |  |  | ------------------- | ------ | ----------- |  | -------------- | ----- | -----------------
|
|                                       |  |  |  |                     |        |             |  |                |       |                  
|Balance at
September 30, 2002          |  |  |  |                     |        |             |  | $              | 3,145 |                  
|Comprehensive
income:                  |  |  |  |                     |        |             |  |                |       |                  
|Net
income                             |  |  |  | $                   | 37,859 |             |  |                |      |                  
|Other
comprehensive income, net of tax |  |  |  |                     | 257    |             |  |                |      |                  
|Comprehensive
income                   |  |  |  | $                   | 38,116 |             |  |                |       |                  
|Stock options
exercised                |  |  |  |                     |        |             |  |                | 18    |                  
|Amortization of
award of ESOP and RRP  |  |  |  |                     |        |             |  |                |      |                  
|Dividends
paid                         |  |  |  |                     |        |             |  |                |      |                  
|Tax benefit of
stock plans             |  |  |  |                     |        |             |  |                |      |                  
|Purchase of
treasury shares            |  |  |  |                     |        |             |  |                |      |                  
|                                       |  |  |  |                     |        |             |  |                |       |                  
|Balance at
September 30, 2003          |  |  |  |                     |        |             |  | $              | 3,163 |                  
|Comprehensive
income:                  |  |  |  |                     |        |             |  |                |       |                  
|Net
income                             |  |  |  | $                   | 40,996 |             |  |                |      |                  
|Other
comprehensive loss, net of tax   |  |  |  |                     | (2,893 | )           |  |                |      |                  
|Comprehensive
income                   |  |  |  | $                   | 38,103 |             |  |                |       |                  
|Stock options
exercised                |  |  |  |                     |        |             |  |                | 16    |                  
|Amortization of
award of ESOP and RRP  |  |  |  |                     |        |             |  |                |      |                  
|Dividends
paid                         |  |  |  |                     |        |             |  |                |      |                  
|Tax benefit of
stock plans             |  |  |  |                     |        |             |  |                |      |                  
|Purchase of
treasury shares            |  |  |  |                     |        |             |  |                |      |                  
|                                       |  |  |  |                     |        |             |  |                |       |                  
|Balance at
September 30, 2004          |  |  |  |                     |        |             |  | $              | 3,179 |                  
|Comprehensive
income:                  |  |  |  |                     |        |             |  |                |       |                  
|Net
income                             |  |  |  | $                   | 46,196 |             |  |                |      |                  
|Other
comprehensive loss, net of tax   |  |  |  |                     | (754   | )           |  |                |      |                  
|Comprehensive
income                   |  |  |  | $                   | 45,442 |             |  |                |       |                  
|Stock options
exercised                |  |  |  |                     |        |             |  |                | 21    |                  
|Amortization of
award of ESOP and RRP  |  |  |  |                     |        |             |  |                |      |                  
|Dividends
paid                         |  |  |  |                     |        |             |  |                |      |                  
|Tax benefit of
stock plans             |  |  |  |                     |        |             |  |                |      |                  
|Purchase of
treasury shares            |  |  |  |                     |        |             |  |                |      |                  
|                                       |  |  |  |                     |        |             |  |                |       |                  
|Balance at
September 30, 2005          |  |  |  |                     |        |             |  | $              | 3,200 |                  



See accompanying notes to consolidated financial
statements.









38


---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITYAND COMPREHENSIVE INCOME







|Accumulatedothercomprehensive(loss)
income |  |  |  | Commonstockpurchasedby ESOP |         | Commonstockpurchasedby RRP |  | Treasurystock |        | Total
|------------------------------------------ |  |  |  | --------------------------- | ------- | -------------------------- |  | ------------- | ------ | -----
|
|                                           |  |  |  |                             |         |                            |  |               |        |      
|$2,338                                     |  |  |  | $                           | (10,650 | )                          |  | $             | (3,652 | )    
|                                           |  |  |  |                             |         |                            |  |               |        |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|257                                        |  |  |  |                             |        |                            |  |               |       |      
|                                           |  |  |  |                             |         |                            |  |               |        |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                          |  |  |  |                             | 698     |                            |  |               | 857    |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                           |  |  |  |                             |         |                            |  |               |        |      
|$2,595                                     |  |  |  | $                           | (9,952  | )                          |  | $             | (2,795 | )    
|                                           |  |  |  |                             |         |                            |  |               |        |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|(2,893)                                    |  |  |  |                             |        |                            |  |               |       |      
|                                           |  |  |  |                             |         |                            |  |               |        |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                          |  |  |  |                             | 698     |                            |  |               | 567    |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                           |  |  |  |                             |         |                            |  |               |        |      
|$(298)                                     |  |  |  | $                           | (9,254  | )                          |  | $             | (2,228 | )    
|                                           |  |  |  |                             |         |                            |  |               |        |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|(754)                                      |  |  |  |                             |        |                            |  |               |       |      
|                                           |  |  |  |                             |         |                            |  |               |        |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                          |  |  |  |                             | 699     |                            |  |               | 547    |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                          |  |  |  |                             |        |                            |  |               |       |      
|                                           |  |  |  |                             |         |                            |  |               |        |      
|$(1,052)                                   |  |  |  | $                           | (8,555  | )                          |  | $             | (1,681 | )    








2005 Annual Report




39


---



CONSOLIDATED STATEMENTS OF CASH
FLOWS




Years ended September 30, 2005, 2004 and
2003







|                                                                                  |  |  |  | 2005 |          | 2004 |  | 2003
|--------------------------------------------------------------------------------- |  |  |  | ---- | -------- | ---- |  | ----
|
|Cash flows from operating activities:                                             |  |  |  |      |          |      |  |     
|Net
income                                                                        |  |  |  | $    | 46,196   |      |  | $   
|Adjustments
to reconcile net income to net cash provided by operating activities: |  |  |  |      |          |      |  |     
|Gain on sale
of mortgage-backed securities                                        |  |  |  |      | (139     | )    |  |     
|Loss (gain)
on sale of debt securities available for sale                         |  |  |  |      | 98       |      |  |     
|Gain on sale
of equity securities available for sale                              |  |  |  |      |         |      |  |     
|(Gain) loss
on disposal of premises and equipment                                 |  |  |  |      | (800     | )    |  |     
|Gain on sale
of real estate owned                                                 |  |  |  |      | (30      | )    |  |     
|Gain on sale
of mortgage loans                                                    |  |  |  |      | (2,289   | )    |  |     
|Provision for
loan losses                                                         |  |  |  |      | 1,915    |      |  |     
|Provision for
losses on real estate owned                                         |  |  |  |      | 15       |      |  |     
|Depreciation
and amortization                                                     |  |  |  |      | 815      |      |  |     
|ESOP
forfeitures transferred to treasury stock                                    |  |  |  |      |         |      |  |     
|Deferred
income tax expense (benefit)                                             |  |  |  |      | 637      |      |  |     
|Originations
of loans held for sale                                               |  |  |  |      | (133,117 | )    |  |     
|Proceeds from
sale of loans held for sale                                         |  |  |  |      | 125,820  |      |  |     
|Increase in
deferred loan fees and costs                                          |  |  |  |      | 8,766    |      |  |     
|Increase in
accrued interest receivable                                           |  |  |  |      | (1,348   | )    |  |     
|Decrease
(increase) in other assets                                               |  |  |  |      | 859      |      |  |     
|(Decrease)
increase in income taxes payable                                       |  |  |  |      | (6,033   | )    |  |     
|Increase in
other liabilities                                                     |  |  |  |      | 66       |      |  |     
|                                                                                  |  |  |  |      |          |      |  |     
|Net cash
provided by operating activities                                         |  |  |  |      | 41,431   |      |  |     
|                                                                                 
|Cash flows from investing activities:                                             |  |  |  |      |          |      |  |     
|Net increase
in loans                                                             |  |  |  |      | (387,628 | )    |  |     
|Purchase of
mortgage-backed securities                                            |  |  |  |      | (55,145  | )    |  |     
|Proceeds from
sale of mortgage-backed securities                                  |  |  |  |      | 4,631    |      |  |     
|Proceeds from
principal repayments of mortgage-backed securities                  |  |  |  |      | 104,253  |      |  |     
|Purchase of
investment securities available for sale                              |  |  |  |      | (39,954  | )    |  |     
|Proceeds from
sale of investment securities available for sale                    |  |  |  |      | 29,941   |      |  |     
|Proceeds from
maturities and calls of investment securities available for sale    |  |  |  |      | 10,000   |      |  |     
|Purchase of
investment securities held to maturity                                |  |  |  |      |         |      |  |     
|Proceeds from
calls of investment securities held to maturity                     |  |  |  |      | 155      |      |  |     
|Proceeds from
sale of real estate owned                                           |  |  |  |      | 230      |      |  |     
|Purchase of
premises and equipment                                                |  |  |  |      | (18,185  | )    |  |     
|Proceeds from
disposal of premises and equipment                                  |  |  |  |      | 1,437    |      |  |     
|FHLB stock
purchase, net                                                          |  |  |  |      | (3,236   | )    |  |     
|Purchase of
insurance agencies                                                    |  |  |  |      |         |      |  |     
|                                                                                  |  |  |  |      |          |      |  |     
|Net cash used
in investing activities                                             |  |  |  |      | (353,501 | )    |  |     








40


---



CONSOLIDATED STATEMENTS OF CASH
FLOWS




Years ended September 30, 2005, 2004 and
2003







|                                                                             |  |  |  | 2005 |         | 2004 |  | 2003
|---------------------------------------------------------------------------- |  |  |  | ---- | ------- | ---- |  | ----
|
|Cash flows from financing activities:                                        |  |  |  |      |         |      |  |     
|Net increase
in deposits                                                     |  |  |  | $    | 311,477 |      |  | $   
|Net proceeds
of short-term borrowings                                        |  |  |  |      | (13,785 | )    |  |     
|Repayments of
long-term debt                                                 |  |  |  |      | (30,019 | )    |  |     
|Net proceeds
from long-term debt                                             |  |  |  |      | 85,000  |      |  |     
|Increase in
advance payments by borrowers for taxes and insurance            |  |  |  |      | 5,112   |      |  |     
|Dividends
paid                                                               |  |  |  |      | (17,298 | )    |  |     
|Common stock
options exercised                                               |  |  |  |      | 2,306   |      |  |     
|Purchase of
treasury stock                                                   |  |  |  |      | (664    | )    |  |     
|                                                                             |  |  |  |      |         |      |  |     
|Net cash
provided by financing activities                                    |  |  |  |      | 342,129 |      |  |     
|                                                                             |  |  |  |      |         |      |  |     
|Net increase
(decrease) in cash and cash equivalents                         |  |  |  |      | 30,059  |      |  |     
|                                                                             |  |  |  |      |         |      |  |     
|Cash and cash
equivalents  beginning of year                                |  |  |  |      | 74,875  |      |  |     
|                                                                             |  |  |  |      |         |      |  |     
|Cash and cash
equivalents  end of year                                      |  |  |  | $    | 104,934 |      |  | $   
|                                                                             |  |  |  |      |         |      |  |     
|Supplemental disclosures:                                                    |  |  |  |      |         |      |  |     
|Cash paid
for:                                                               |  |  |  |      |         |      |  |     
|Interest                                                                     |  |  |  | $    | 55,715  |      |  | $   
|Taxes                                                                        |  |  |  |      | 35,145  |      |  |     
|Noncash
investing and financing activities:                                  |  |  |  |      |         |      |  |     
|Additions to
real estate acquired in settlement of loans through foreclosure |  |  |  |      | 175     |      |  |     
|Sale of real
estate owned financed by the Company                            |  |  |  |      |        |      |  |     
|Change in
unrealized (loss) gain on securities available for sale            |  |  |  |      | (951    | )    |  |     
|Change in
deferred taxes related to securities available for sale            |  |  |  |      | 367     |      |  |     
|Increase in
liability related to SERP                                        |  |  |  |      | (277    | )    |  |     
|Deferred tax
benefit related to SERP                                         |  |  |  |      | 107     |      |  |     
|Distribution
of RRP shares                                                   |  |  |  |      | 547     |      |  |     
|Tax benefit
of stock plans credited to capital                               |  |  |  |      | 886     |      |  |     
|Transfer to
short-term borrowings from long-term debt                        |  |  |  |      | 5,000   |      |  |     
|Non-accrual
loan made available for sale                                     |  |  |  |      | 1,329   |      |  |     
|Adjustment to
goodwill for tax benefit related to insurance agency purchase  |  |  |  |      |        |      |  |     
|Note payable
issued to purchase premises                                     |  |  |  |      |        |      |  |     



See accompanying notes to consolidated financial
statements.









2005 Annual Report




41


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS









September 30, 2005, 2004 and
2003


|(1) |  | Summary of Significant Accounting
Policies
|--- |  | ------------------------------------------

|(a) |  | Nature of Business, Reorganization and
Offering of Common Stock
|--- |  | ---------------------------------------------------------------



Harbor Florida Bancshares, Inc.
(the Company or Bancshares) is the holding company for Harbor Federal Savings Bank (the Bank). The Company owns
100% of the Banks common stock. Currently, it engages in no other significant activities beyond its ownership of the Banks common stock.
Consequently, its net income is derived from the Bank. The Bank provides a wide range of banking and related insurance services but is principally
engaged in the business of attracting deposits predominately from the communities it serves and using these and other funds to originate primarily
residential, consumer and commercial real estate loans. Harbor Insurance Agency, Inc., a wholly owned subsidiary of the Bank, also provides a wide
range of insurance products.


|(b) |  | Basis of Presentation
|--- |  | ---------------------



The accompanying consolidated
financial statements include the accounts of Harbor Florida Bancshares, Inc., the Bank and the Banks wholly owned subsidiaries. In consolidation,
all significant intercompany accounts and transactions have been eliminated.




The consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). In preparing the
consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of the statement of financial condition and revenues and expenses for the
period. Actual results could differ significantly from those estimates.




Material estimates that are
particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the
determination of the allowances for loan losses, management obtains independent appraisals for significant properties.




As of September 30, 2005,
substantially all of the Companys loans and investment in real estate owned are secured by real estate in the counties in which the Company has
branch facilities: St. Lucie, Indian River, Brevard, Martin, Okeechobee, Lake and Volusia Counties, Florida. Accordingly, the ultimate collectibility
of a substantial portion of the Companys loan portfolio and the recovery of a substantial portion of the carrying amount of real estate owned are
susceptible to changes in market conditions in the above counties. Management believes that the allowances for losses on loans and real estate owned
are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances may be
necessary based on changes in economic conditions, particularly in the above counties. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Companys allowances for losses on loans and real estate owned. Such agencies may require the
Company to recognize changes to the allowances based on their judgments about information available to them at the time of their
examination.


|(c) |  | Loan Origination and Commitment Fees and
Related Costs
|--- |  | ------------------------------------------------------



Loan fees and certain direct loan
origination costs are deferred, and the net amount is recognized in interest income using the interest method over the contractual life of the loans.
Commitment fees and costs relating to commitments whose likelihood of exercise is remote are recognized over the commitment period on a straight-line
basis. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is
recognized over the life of the loan as an adjustment of yield.


|(d) |  | Loan Interest Income
|--- |  | --------------------



The Company reverses accrued
interest related to loans which are 90 days or more delinquent or placed on non-accrual status. Such interest is recorded as income when collected.
Amortization of net deferred loan fees and accretion of discounts are discontinued for loans that are 90 days or more delinquent. Interest income on
impaired loans is recognized on an accrual basis unless designated nonaccrual as noted above.









42


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


|(e) |  | Investment and Mortgage-backed
securities
|--- |  | -----------------------------------------



Bonds, notes, and other debt
securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that
are recognized in interest income using the interest method over the estimated period to maturity.




Available for sale securities
consist of bonds, notes, other debt securities and certain equity securities not classified as held to maturity securities. Available for sale
securities are reported at estimated market value and include securities that are being held for an unspecified period of time, such as those the
Company would consider selling to meet liquidity needs or as part of the Companys risk management program. Unrealized holding gains and losses,
net of tax, on available for sale securities are reported as a component of comprehensive income in stockholders equity until
realized.




Gains and losses on the sale of
available for sale securities are determined using the specific-identification method.




Declines in the fair value of
individual held to maturity and available for sale securities below their cost that are other than temporary results in write-downs of the individual
securities to their fair value. The related write-downs are included in earnings as realized losses.




At September 30, 2005 and 2004,
the Company had no material commitments to purchase or sell investment or mortgage-backed securities.


|(f) |  | Loans
|--- |  | -----



Loans are stated at unpaid
principal balances, less loans in process, the allowance for loan losses and net deferred loan origination fees and discounts. Discounts on mortgage
loans are amortized to interest income using the interest method over the remaining period to contractual maturity.




The Company follows a consistent
procedural discipline and accounts for loan loss contingencies in accordance with Statement of Financial Accounting Standards (SFAS) No. 5,
Accounting for Contingencies (Statement 5) and SFAS No. 114, Accounting by Creditors for Impairment of a Loan
(Statement 114). The following is a description of how each portion of the allowance for loan losses is determined.




The Company segregates the loan
portfolio for loan loss purposes into the following broad segments: commercial real estate; residential real estate; commercial business; and consumer.
The Company provides for a general allowance for losses inherent in the portfolio by the above categories, consisting of two components: (1) General
loss percentages are established based upon historical analyses. (2) A supplemental portion of the allowance may be established for inherent losses
which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used, due to the risk of
error and/or inherent imprecision in the process. This portion of the allowance is particularly subjective and requires judgments based on qualitative
factors, which do not lend themselves to exact mathematical calculations, such as: trends in delinquencies and nonaccruals; migration trends in the
portfolio; trends in volume, terms, and portfolio mix; new credit products and/or changes in the geographic distribution of those products; changes in
lending policies and procedures; loan review reports on the efficacy of the risk identification process; changes in the outlook for local, regional and
national economic conditions; concentrations of credit; and peer group comparisons.




Specific allowances are provided
in the event that the specific collateral analysis on each impaired loan indicates that the probable loss upon liquidation of collateral would be in
excess of the general percentage allocation. The provision for loan losses is debited or credited in order to state the allowance for loan losses to
the required level as determined above.




The Company considers a loan to
be impaired when it is probable that the Company will be unable to collect all amounts due, both principal and interest, according to the contractual
terms of the loan agreement. When a loan is impaired, the Company may measure impairment based on (a) the present value of the expected future cash
flows of the impaired loan discounted at the loans original effective interest rate, (b) the observable market price of the impaired loan, or (c)
the fair value of the collateral of a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis, except
collateral-dependent loans, for which foreclosure is probable, must be measured at the fair









2005 Annual Report




43


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




value of the collateral. In a
troubled debt restructuring involving a restructured loan, the Company measures impairment by discounting the total expected future cash flows at the
loans original effective rate of interest.


|(g) |  | Loans Held for Sale
|--- |  | -------------------



Mortgage loans originated and
intended for sale in the secondary market, comprised of 1-4 family residential loans, are carried at the lower of cost or estimated market value, in
the aggregate. Market value is determined by actual commitment or current Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage
Corporation (FHLMC) rates. Net unrealized losses are recognized through a valuation allowance by charges to income.


|(h) |  | Transfers of Financial Assets and
Servicing Rights Retained
|--- |  | -----------------------------------------------------------



Transfers of financial assets,
primarily mortgage loans, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity.




Upon completion of a transfer of
assets that satisfies the conditions described above to be accounted for as a sale, the Company:


|a. |  | Derecognizes all assets sold;
|-- |  | -----------------------------

|b. |  | Recognizes all assets obtained and liabilities incurred in
consideration as proceeds of the sale;
|-- |  | -------------------------------------------------------------------------------------------------

|c. |  | Initially measures, at fair value, assets obtained and
liabilities incurred in a sale; and
|-- |  | ------------------------------------------------------------------------------------------

|d. |  | Recognizes in earnings any gain or loss on the sale.
|-- |  | ----------------------------------------------------



The Company receives fees for
servicing activities on loans it has sold. These activities include, but are not limited to, collecting principal, interest and escrow payments from
borrowers; paying taxes and insurance from escrowed funds; monitoring delinquencies; and accounting for and remitting principal and interest payments.
To the extent that the servicing fees exceed or do not provide adequate compensation for the services provided, the Company records a servicing asset
or liability for the fair value of the servicing retained. Currently, the servicing fees retained by the Company are just adequate to compensate the
Company for the servicing responsibilities. As of September 30, 2005 and 2004, no servicing assets and/or liabilities were recognized.


|(i) |  | Real Estate Owned
|--- |  | -----------------



Real estate properties acquired
through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Real estate owned is included in other assets in the accompanying consolidated statements of financial
condition. Revenue and expenses from operations and changes in the valuation allowance are included in income from real estate operations in the
accompanying consolidated statements of earnings.


|(j) |  | Premises and Equipment
|--- |  | ----------------------



Premises and equipment are
carried at cost less accumulated depreciation and amortization. Depreciation of premises and equipment is provided on the straight-line method over the
estimated useful lives of the related assets. Estimated lives are three to thirty years for buildings and improvements and three to ten years for
furniture and equipment. Leasehold improvements are amortized on the straight-line method over the shorter of the remaining term of the related leases
or their estimated useful lives.




Maintenance and repairs are
charged to expense as incurred and improvements are capitalized. The cost and accumulated depreciation relating to premises and equipment retired or
otherwise disposed of are eliminated from the accounts and any resulting gains or losses are credited or charged to income.









44


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


|(k) |  | Long Lived Assets
|--- |  | -----------------



The Company evaluates long-lived
assets, such as property, plant, and equipment and purchased intangibles subject to amortization, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of the
asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds the estimated future cash
flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset.




Goodwill is tested for impairment
annually in lieu of amortization or on an interim basis if an event or circumstance indicates that an impairment loss is likely. Goodwill is considered
impaired, and a loss is recognized, when its carrying value exceeds its implied fair value. The implied fair value is calculated by first comparing the
fair value of the reporting unit with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value,
an indication of goodwill impairment exists for the reporting unit and the Company would perform a second step to measure the impairment. If the fair
value of the reporting unit exceeds its carrying value, the second step is not performed. In the second step of the impairment test, the fair value of
tangible net assets and both recognized and unrecognized intangible assets are deducted from the fair value of the reporting unit to determine the
implied fair value of reporting unit goodwill. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is
impaired and is written down to its implied fair value. The loss recognized is not allowed to exceed the carrying amount of goodwill. Upon recognition
of an impairment loss, the adjusted amount of goodwill is the carrying amount for future impairment testing. Once a loss is recognized, future
increases in fair value will not result in reversal of the previously recognized loss.


|(l) |  | Income Taxes
|--- |  | ------------



The Company and its subsidiaries
file consolidated income tax returns. The Company uses the asset and liability method to account for income taxes. Under the asset and liability
method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.


|(m) |  | Pension Plan
|--- |  | ------------



The Companys policy is to
fund pension costs related to the Pension Plan as they accrue based on normal cost. (See note 16)


|(n) |  | Stock-Based
Compensation
|--- |  | ------------------------



At September 30, 2005, the
Company maintained stock option plans for the benefit of directors, officers and other employees of the Company. The Company currently accounts for
those plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to
Employees (APB 25) and related interpretations. Accordingly, no compensation cost has been recognized for the stock plans, since
stock option exercise prices are equal to market price at dates of grant.




Had compensation cost for the
Companys stock-based compensation plans been determined in accordance with the fair value based method in SFAS No. 123 (revised),
Share-Based Payments (Statement 123R), which is a revision of SFAS Statement No. 123 Accounting for Stock Based
Compensation, the Companys net income and net income per share would have been reduced to the pro forma amounts indicated
below:









2005 Annual Report




45


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS







|                                                                                                                                      |  |  |  | 2005 |        | 2004 |  | 2003
|------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|                                                                                                                                      |  |  |  |      |        |      |  |     
|Net income
 As reported                                                                                                              |  |  |  | $    | 46,196 |      |  | $   
|Less: total
stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax |  |  |  |      | (484   | )    |  |     
|Pro forma net
income                                                                                                                  |  |  |  |      | 45,712 |      |  |     
|                                                                                                                                     
|Net income
per share  basic                                                                                                          |  |  |  |      |        |      |  |     
|As
reported                                                                                                                           |  |  |  | $    | 2.03   |      |  | $   
|Pro
forma                                                                                                                             |  |  |  |      | 2.00   |      |  |     
|                                                                                                                                     
|Net income
per share  diluted                                                                                                        |  |  |  |      |        |      |  |     
|As
reported                                                                                                                           |  |  |  |      | 1.98   |      |  |     
|Pro
forma                                                                                                                             |  |  |  |      | 1.96   |      |  |     



The following per share weighted
average fair values of stock options granted during the twelve months ended September 30, 2005 and 2004 were calculated using the Binomial option
pricing model and the following weighted average assumptions:







|                        |  |  |  | 2005 |        | 2004
|----------------------- |  |  |  | ---- | ------ | ----
|Options
granted         |  |  |  |      | 41,500 |     
|Grant date fair
value   |  |  |  | $    | 10.82  |     
|Exercise
price          |  |  |  | $    | 34.86  |     
|Risk-free
interest rate |  |  |  |      | 3.69   | %   
|Expected life
(years)   |  |  |  |      | 6      |     
|Expected
volatility     |  |  |  |      | 25.62  | %   
|Expected
dividend       |  |  |  | $    | 1.17   |     

|(o) |  | Statement of Cash
Flows
|--- |  | -----------------------



Cash equivalents include amounts
due from depository institutions and interest-bearing deposits in other banks. For purposes of cash flows, the Company considers all highly liquid debt
instruments with original maturities when purchased of three months or less to be cash equivalents.


|(p) |  | Net Income Per Share
|--- |  | --------------------



Basic earnings per share excludes
dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if shares related to stock benefit plans were exercised or vested during the period.


|(q) |  | Reclassification
|--- |  | ----------------



Certain amounts included in the
2004 and 2003 consolidated financial statements have been reclassified in order to conform to the 2005 presentation.









46


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


|(r) |  | Derivative Instruments
|--- |  | ----------------------



The Company does not purchase,
sell or enter into derivative financial instruments or derivative commodity instruments as defined by SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (Statement 133), except for commitments to originate mortgage loans that will be held for sale,
which the Company enters into in the normal course of business. The fair value of these commitments is not material.


|(s) |  | New Accounting
Pronouncements
|--- |  | -----------------------------



In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement 123R. This statement, which supersedes APB 25, would eliminate the ability to account for
share-based compensation transactions using APB 25 and require all share-based payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. The provision of Statement 123R will be effective for options vesting after
September 30, 2005 and is expected to result in approximately $425,000 to $475,000 additional expense, net of tax, in fiscal year
2006.




In May 2005, the FASB issued SFAS
No. 154, Accounting Changes and Error Corrections (Statement 154), which replaces APB 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements  An Amendment of APB 28. Statement 154 changes the
requirements for the accounting for and reporting of a change in accounting principle. It applies to all voluntary changes in accounting principle and
to changes required by an accounting pronouncement that does not include specific transition provisions. This statement requires retrospective
application to prior period financial statements of changes in accounting principle, unless it is impractical to determine either the period-specific
or cumulative effects of the change. Statement 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The
adoption of this standard is not expected to have a material impact on the Companys financial statements.




In November 2005, the FASB issued
Staff Position (FSP) No. FAS 115-1 and FAS 124-1, The Meaning of Other Than Temporary Impairment and its Application to Certain Investments
(FSP 115-1). FSP 115-1 addresses the determination as to when an investment is considered impaired, whether that impairment is other than
temporary, and the measurement of the impairment loss. It is effective for periods beginning after December 15, 2005 with earlier application
permitted. Implementation of this guidance is not expected to have a material impact on the companys financial statements.









2005 Annual Report




47


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


|(2) |  | Investment and Mortgage-backed
Securities
|--- |  | -----------------------------------------



The amortized cost and estimated
market value of investment and mortgage-backed securities at September 30, 2005 are as follows:







|                                 |  |  |  | Amortizedcost |         | Gross unrealizedgains |  | Gross unrealizedlosses |     | Estimatedmarket value
|-------------------------------- |  |  |  | ------------- | ------- | --------------------- |  | ---------------------- | --- | ---------------------
|
|Available for
sale:              |  |  |  |               |         |                       |  |                        |     |                      
|FHLB
notes                       |  |  |  | $             | 100,003 |                       |  | $                      |    |                      
|FNMA
notes                       |  |  |  |               | 19,993  |                       |  |                        |    |                      
|FFCB
note                        |  |  |  |               | 10,000  |                       |  |                        |    |                      
|                                 |  |  |  |               | 129,996 |                       |  |                        |    |                      
|Equity
securities                |  |  |  |               | 25      |                       |  |                        |    |                      
|                                 |  |  |  |               | 130,021 |                       |  |                        |    |                      
|Held to
maturity:                |  |  |  |               |         |                       |  |                        |     |                      
|Municipal
securities             |  |  |  |               | 285     |                       |  |                        | 31  |                      
|                                 |  |  |  |               | 285     |                       |  |                        | 31  |                      
|                                
|FHLMC
mortgage-backed securities |  |  |  |               | 231,649 |                       |  |                        | 395 |                      
|FNMA
mortgage-backed securities  |  |  |  |               | 156,809 |                       |  |                        | 491 |                      
|                                 |  |  |  |               | 388,458 |                       |  |                        | 886 |                      
|Total                            |  |  |  | $             | 518,764 |                       |  | $                      | 917 |                      



The amortized cost and estimated
market value of investment and mortgage-backed securities at September 30, 2004 are as follows:







|                                 |  |  |  | Amortizedcost |         | Gross unrealizedgains |  | Gross unrealizedlosses |       | Estimatedmarket value
|-------------------------------- |  |  |  | ------------- | ------- | --------------------- |  | ---------------------- | ----- | ---------------------
|
|Available for
sale:              |  |  |  |               |         |                       |  |                        |       |                      
|FHLB
notes                       |  |  |  | $             | 80,127  |                       |  | $                      | 15    |                      
|FNMA
notes                       |  |  |  |               | 30,018  |                       |  |                        | 11    |                      
|FFCB
note                        |  |  |  |               | 20,074  |                       |  |                        |      |                      
|                                 |  |  |  |               | 130,219 |                       |  |                        | 26    |                      
|Equity
securities                |  |  |  |               | 25      |                       |  |                        |      |                      
|                                 |  |  |  |               | 130,244 |                       |  |                        | 26    |                      
|Held to
maturity:                |  |  |  |               |         |                       |  |                        |       |                      
|Municipal
securities             |  |  |  |               | 440     |                       |  |                        | 37    |                      
|                                 |  |  |  |               | 440     |                       |  |                        | 37    |                      
|                                
|FHLMC
mortgage-backed securities |  |  |  |               | 239,339 |                       |  |                        | 1,244 |                      
|FNMA
mortgage-backed securities  |  |  |  |               | 203,721 |                       |  |                        | 1,235 |                      
|                                 |  |  |  |               | 443,060 |                       |  |                        | 2,479 |                      
|Total                            |  |  |  | $             | 573,744 |                       |  | $                      | 2,542 |                      








48


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




The amortized cost and estimated
market value of debt securities at September 30, 2005 and 2004 by contractual maturity are shown below. Actual maturities of investment securities may
be substantially shorter than contractual maturities because issuers may have the right to call obligations without penalties. The average expected
life of mortgage-backed securities may be substantially shorter than contractual maturity because borrowers may prepay or payoff underlying mortgages
with or without prepayment penalties.







|                            |  |  |  | 2005 |         | 2004 | 
|--------------------------- |  |  |  | ---- | ------- | ---- | 
|
|
|Investment
Securities:      |  |  |  |      |         |      | 
|Available for
sale:         |  |  |  |      |         |      | 
|Due in one
year or less     |  |  |  | $    | 99,996  |      | 
|Due in one to
five years    |  |  |  |      | 30,000  |      | 
|                            |  |  |  |      | 129,996 |      | 
|Held to
maturity:           |  |  |  |      |         |      | 
|Due in one
year or less     |  |  |  |      | 85      |      | 
|Due in one to
five years    |  |  |  |      |        |      | 
|Due after
five years        |  |  |  |      | 200     |      | 
|                            |  |  |  |      | 285     |      | 
|Mortgage-backed Securities: |  |  |  |      |         |      | 
|Held to
maturity:           |  |  |  |      |         |      | 
|Due in one
year or less     |  |  |  |      |        |      | 
|Due in one to
five years    |  |  |  |      | 188,512 |      | 
|Due in five
to ten years    |  |  |  |      | 180,151 |      | 
|Due after ten
years         |  |  |  |      | 19,795  |      | 
|                            |  |  |  |      | 388,458 |      | 
|                            |  |  |  | $    | 518,739 |      | 



As of September 30, 2005, the
Company had pledged mortgage-backed securities with a market value of $35,600,000 and a carrying value of $35,815,000 to collateralize the public funds
on deposit. The Company had also pledged mortgage-backed securities with a market value of $1,111,000 and a carrying value of $1,073,000 to
collateralize treasury, tax and loan accounts as of September 30, 2005.




Gross realized gains and gross
realized losses on sales of available for sale securities totaled $-0- and $98,000 during 2005. Gross realized gains and gross realized losses on sales
of available for sale securities totaled $2,232,000 and $175,000 during 2004. Gross realized gains and gross realized losses on sales of available for
sale securities totaled $1,664,000 and $-0- during 2003. During the year ended September 30, 2005 and 2004, the Company recognized gain of
approximately $139,000 and $188,000 on the sale of numerous small balance mortgage-backed securities where more than 85% of the principal had been
repaid.




Gross unrealized losses on
investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at September 30, 2005, were as follows:









2005 Annual Report




49


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS







|                           |  |  |  | Less than 12 months |         | 12 months or more |  | Total |      
|-------------------------- |  |  |  | ------------------- | ------- | ----------------- |  | ----- | -----
|
|Available for
sale         |  |  |  |                     |         |                   |  |       |      
|Agency
securities          |  |  |  | $                   | 39,704  |                   |  | $     | 294  
|                          
|Held to
maturity           |  |  |  |                     |         |                   |  |       |      
|Mortgage-backed securities |  |  |  |                     | 173,567 |                   |  |       | 4,086
|Total                      |  |  |  | $                   | 213,271 |                   |  | $     | 4,380



Agency securities: The unrealized
losses on investments in the AAA rated agency securities were caused by interest rate increases. The Company has the ability and intent to hold these
investments until a market price recovery or maturity. Therefore, these investments are not considered other-than-temporarily
impaired.




Mortgage-backed securities: The
unrealized loses on investments in the AAA rated mortgage-backed securities were caused by interest rate increases. The contractual cash flows of these
securities are guaranteed by FNMA and FHLMC. The decline in fair value is attributable to changes in interest rates and not credit downgrades. The
Company has the ability and intent to hold these investments until a market price recovery or maturity. Therefore, these investments are not considered
other-than-temporarily impaired.









50


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


|(3) |  | Loans
|--- |  | -----



Loans at September 30, 2005 and
2004 are summarized below:







|                                      |  |  |  | 2005 |           | 2004
|------------------------------------- |  |  |  | ---- | --------- | ----
|
|Mortgage
loans:                       |  |  |  |      |           |     
|Construction
1-4 family               |  |  |  | $    | 435,681   |     
|Permanent 1-4
family                  |  |  |  |      | 1,194,665 |     
|Multi-family                          |  |  |  |      | 34,516    |     
|Nonresidential                        |  |  |  |      | 271,195   |     
|Land                                  |  |  |  |      | 308,222   |     
|Total
mortgage loans                  |  |  |  |      | 2,244,279 |     
|                                     
|Other
loans:                          |  |  |  |      |           |     
|Commercial                            |  |  |  |      | 89,079    |     
|Home equity
lines of credit           |  |  |  |      | 74,190    |     
|Other
consumer secured by real estate |  |  |  |      | 123,622   |     
|Other
consumer                        |  |  |  |      | 47,047    |     
|Total other
loans                     |  |  |  |      | 333,938   |     
|Total
loans                           |  |  |  |      | 2,578,217 |     
|                                     
|Less:                                 |  |  |  |      |           |     
|Loans in
process                      |  |  |  |      | 271,007   |     
|Net deferred
loan fees and discounts  |  |  |  |      | 11,601    |     
|Allowance for
loan losses             |  |  |  |      | 19,748    |     
|                                      |  |  |  |      | 302,356   |     
|Total loans,
net                      |  |  |  | $    | 2,275,861 |     
|Weighted average
yield                |  |  |  |      | 6.81      | %   



An analysis of the allowance for
loan losses for the years ended September 30, 2005, 2004 and 2003 follows:







|                          |  |  |  | 2005 |        | 2004 |  | 2003
|------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|                          |  |  |  |      |        |      |  |     
|Beginning
balance         |  |  |  | $    | 17,802 |      |  | $   
|Provision for
loan losses |  |  |  |      | 1,915  |      |  |     
|Charge-offs               |  |  |  |      | (89    | )    |  |     
|Recoveries                |  |  |  |      | 120    |      |  |     
|Ending
balance            |  |  |  | $    | 19,748 |      |  | $   



The allowance for loan losses was
$19,748,000 and $17,802,000 at September 30, 2005 and 2004, respectively. The Company evaluates impaired loans based on (a) the present value of the
expected future cash flows of the impaired loan discounted at the loans original effective interest rate, (b) the observable market price of the
impaired loan, or (c) the fair value of the collateral of a collateral dependent loan. To the extent that an impaired loans value is less than
the loans recorded investment, a specific allowance is recorded.









2005 Annual Report




51


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




The investment in impaired loans
(primarily consisting of classified loans), other than those evaluated collectively for impairment, at September 30, 2005, 2004 and 2003 was
$4,213,000, $4,627,000 and $6,259,000, respectively. The average recorded investment in impaired loans during the years ended September 30, 2005, 2004
and 2003 was approximately $3,487,000, $5,568,000 and $8,011,000, respectively. There are no commitments to lend additional funds to these borrowers.
The total specific allowance for loan losses related to these loans was $243,000 and $-0- at September 30, 2005 and 2004, respectively. Interest income
on impaired loans of approximately $248,000, $381,000 and $584,000 was recognized in the years ended September 30, 2005, 2004 and 2003,
respectively.




At September 30, 2005 and 2004,
loans with unpaid principal balances of approximately $2,182,000 and $3,032,000, respectively, were 90 days or more contractually delinquent or on
nonaccrual status. Interest income relating to nonaccrual loans not recognized for the years ended September 30, 2005, 2004 and 2003 totaled
approximately $103,000, $146,000, and $147,000, respectively.




As of September 30, 2005 and
2004, approximately $1,144,000 and $2,777,000, respectively, of loans 90 days or more contractually delinquent were in the process of
foreclosure.




As of September 30, 2005 and
2004, mortgage loans which had been sold on a recourse basis had outstanding principal balances of $72,000 and $113,000, respectively.




Accrued interest receivable at
September 30, 2005 and 2004 is summarized below:







|                                  |  |  |  | 2005 |        | 2004 | 
|--------------------------------- |  |  |  | ---- | ------ | ---- | 
|
|                                  |  |  |  |      |        |      | 
|Loans                             |  |  |  | $    | 10,305 |      | 
|Investment
securities             |  |  |  |      | 702    |      | 
|Mortgage-backed
securities        |  |  |  |      | 1,317  |      | 
|FHLB stock
dividends              |  |  |  |      | 267    |      | 
|Total accrued
interest receivable |  |  |  | $    | 12,591 |      | 



The Company is a party to
financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The contract or notional amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments as it does
for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring
procedures. Such commitments are agreements to lend to a customer as long as there is no violation of conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses. Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed
necessary. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.




Outstanding commitments to fund
mortgage loans to be held for investment purposes (excluding loans in process), that generally expire in 60 days, amounted to approximately $70,342,000
($21,938,000 fixed rate, interest rates from 4.99% to 8.13%) as of September 30, 2005. In addition, as of September 30, 2005, the Company had
determined that $125,751,000 might be lent to certain homebuilders on a variable rate and home-by-home basis, subject to underwriting and product
approval by the Company. Outstanding commitments to fund other loans as of September 30, 2005 were approximately $1,300,000.









52


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


|(4) |  | Loan Servicing
|--- |  | --------------



Mortgage loans, including those
underlying pass through securities, serviced for others are not included in the accompanying consolidated financial statements. The unpaid principal
balances of these loans at September 30, 2005 and 2004 are summarized as follows:







|                |  |  |  | 2005 |         | 2004
|--------------- |  |  |  | ---- | ------- | ----
|
|                |  |  |  |      |         |     
|FNMA            |  |  |  | $    | 299,620 |     
|FHLMC           |  |  |  |      | 5,477   |     
|Other
investors |  |  |  |      | 7,582   |     
|Total           |  |  |  | $    | 312,679 |     



At September 30, 2005 and 2004,
collection of principal and interest to be remitted to FNMA and FHLMC and advance payment for taxes and insurance relating to FNMA and FHLMC serviced
loans are reflected in the consolidated statements of financial condition as advance payments by borrowers for taxes and insurance.


|(5) |  | Premises and Equipment
|--- |  | ----------------------



Premises and equipment at
September 30, 2005 and 2004 are summarized as follows:







|                                               |  |  |  | 2005 |         | 2004
|---------------------------------------------- |  |  |  | ---- | ------- | ----
|
|                                               |  |  |  |      |         |     
|Land                                           |  |  |  | $    | 23,515  |     
|Buildings and
leasehold improvements           |  |  |  |      | 27,514  |     
|Furniture,
fixtures and equipment              |  |  |  |      | 22,166  |     
|Total                                          |  |  |  |      | 73,195  |     
|Less accumulated
depreciation and amortization |  |  |  |      | (21,909 | )   
|Premises and
equipment, net                    |  |  |  | $    | 51,286  |     



Depreciation expense for the
years ended September 30, 2005, 2004 and 2003 totaled $3,007,000, $2,696,000, and $2,481,000, respectively.









2005 Annual Report




53


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


|(6) |  | Deposits
|--- |  | --------



Deposits at September 30, 2005
and 2004 are summarized as follows:







|                                               |  |  |  | 2005 |           | 2004 | 
|---------------------------------------------- |  |  |  | ---- | --------- | ---- | 
|
|
|                                              
|Commercial
checking                            |  |  |  | $    | 231,487   |      | 
|Noninterest
bearing personal checking accounts |  |  |  |      | 185,757   |      | 
|NOW                                            |  |  |  |      | 154,513   |      | 
|Passbook                                       |  |  |  |      | 185,030   |      | 
|Money market
investment                        |  |  |  |      | 235,514   |      | 
|Official
checks                                |  |  |  |      | 38,353    |      | 
|Subtotal                                       |  |  |  |      | 1,030,654 |      | 
|Certificate
accounts:                          |  |  |  |      |           |      | 
|0.00  2.00%                                   |  |  |  |      | 40,832    |      | 
|2.01  3.00%                                   |  |  |  |      | 286,422   |      | 
|3.01  4.00%                                   |  |  |  |      | 527,765   |      | 
|4.01  5.00%                                   |  |  |  |      | 157,477   |      | 
|5.01  6.00%                                   |  |  |  |      | 12,716    |      | 
|6.01  7.00%                                   |  |  |  |      | 441       |      | 
|                                               |  |  |  |      | 1,025,653 |      | 
|Total
deposits                                 |  |  |  | $    | 2,056,307 |      | 
|Weighted average
interest rate                 |  |  |  |      | 1.97      | %    | 



Maturities of outstanding
certificate accounts at September 30, 2005 and 2004 are summarized as follows:







|            |  |  |  | 2005 |           | 2004
|----------- |  |  |  | ---- | --------- | ----
|
|           
|One
year    |  |  |  | $    | 710,638   |     
|Two
years   |  |  |  |      | 190,625   |     
|Three
years |  |  |  |      | 56,139    |     
|Four
years  |  |  |  |      | 39,574    |     
|Five
years  |  |  |  |      | 18,035    |     
|Thereafter  |  |  |  |      | 10,642    |     
|Total       |  |  |  | $    | 1,025,653 |     



The aggregate amount of
certificate accounts in amounts of $100,000 or more was approximately $307,741,000 and $194,641,000 at September 30, 2005 and 2004, respectively.
Balances of individual certificates in excess of $100,000 are not federally insured.




Interest expense on deposits is
summarized as follows:







|                                                                 |  |  |  | 2005 |        | 2004 |  | 2003
|---------------------------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|                                                                
|Passbook
accounts                                                |  |  |  | $    | 657    |      |  | $   
|NOW, money
market checking, and money market investment accounts |  |  |  |      | 4,836  |      |  |     
|Certificate
accounts                                             |  |  |  |      | 25,283 |      |  |     
|Total                                                            |  |  |  | $    | 30,776 |      |  | $   








54


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




Early withdrawal penalties for
the years ended September 30, 2005, 2004 and 2003 aggregated $248,393, $196,774, and $185,375, respectively, and are netted against interest expense on
certificate accounts.




Accrued interest payable of
$380,811 and $220,111 at September 30, 2005 and 2004, respectively, is included in other liabilities. The aggregate amount of deposits that were
reclassified as loan balances was $842,732 as of September 30, 2005.


|(7) |  | Short-term Borrowings
|--- |  | ---------------------



At September 30, 2005, short-term
borrowings from the Federal Home Loan Bank (FHLB) were comprised of a $5 million advance due December 2005, with a fixed term and fixed interest rate
of 5.95%.




At September 30, 2004, short-term
borrowings from the Federal Home Loan Bank (FHLB) were comprised of $13 million advances due various dates during 2004 and 2005, with fixed terms and
fixed interest rates between 5.86% and 6.14%. Also included in short-term borrowings is the $785,000 remaining balance of a note payable at 6%,
relating to the purchase of premises. The note expired in January 2005 with a balloon payment of the remaining balance of approximately
$764,000.




Information concerning short-term
borrowings is summarized as follows:







|                                          |  |  |  | 2005 |        | 2004
|----------------------------------------- |  |  |  | ---- | ------ | ----
|
|                                         
|Average balance
during the year           |  |  |  | $    | 12,937 |     
|Average interest
rate during the year     |  |  |  |      | 5.53   | %   
|Average interest
rate at September 30     |  |  |  |      | 5.95   | %   
|Maximum
month-end balance during the year |  |  |  | $    | 18,000 |     

|(8) |  | Long-term Debt
|--- |  | --------------



Long-term debt primarily
consisted of advances from the FHLB totaling $590.5 million and $540.5 million at September 30, 2005 and 2004, respectively. The debt is due with fixed
interest rates ranging from 2.56% to 5.57% and fixed terms due at various dates through August 2015 and a $473,000 advance due January
2021.




Pursuant to a collateral
agreement with the FHLB, advances are secured by all stock in the FHLB and a blanket floating lien that requires the Company to maintain qualifying
first mortgage loans as pledged collateral in an amount equal to, when discounted at 80% of the unpaid principal balances, the
advances.




At September 30, 2005 and 2004,
the long-term FHLB advances have fiscal year maturity dates as follows:







|                    |  |  |  | 2005 |         | 2004 | 
|------------------- |  |  |  | ---- | ------- | ---- | 
|
|
|                   
|2006                |  |  |  | $    |        |      | 
|2007                |  |  |  |      |        |      | 
|2008                |  |  |  |      | 85,000  |      | 
|2009                |  |  |  |      | 60,000  |      | 
|2011 and
thereafter |  |  |  |      | 445,473 |      | 
|Total               |  |  |  | $    | 590,473 |      | 








2005 Annual Report




55


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




Of the $445.5 million advances
due 2011 and after, the FHLB could call $75 million on specified dates in 2006, $160 million on specified dates in 2007, $50 million on specified dates
in 2008, $75 million on specified dates in 2009 and $85 million on specified dates in 2010.




Other interest expense is
summarized as follows:







|                       |  |  |  | 2005 |        | 2004 |  | 2003
|---------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|                       |  |  |  |      |        |      |  |     
|Advances from
the FHLB |  |  |  | $    | 25,273 |      |  | $   
|Other                  |  |  |  |      | 16     |      |  |     
|Total                  |  |  |  | $    | 25,289 |      |  | $   

|(9) |  | Income Taxes
|--- |  | ------------



Income tax expense (benefit) for
the years ended September 30, 2005, 2004 and 2003 is summarized as follows:







|                         |  |  |  | 2005 |        | 2004 |  | 2003
|------------------------ |  |  |  | ---- | ------ | ---- |  | ----
|
|Current:                 |  |  |  |      |        |      |  |     
|Federal                  |  |  |  | $    | 24,970 |      |  | $   
|State                    |  |  |  |      | 4,142  |      |  |     
|                         |  |  |  |      | 29,112 |      |  |     
|Deferred:                |  |  |  |      |        |      |  |     
|Federal                  |  |  |  |      | 546    |      |  |     
|State                    |  |  |  |      | 91     |      |  |     
|                         |  |  |  |      | 637    |      |  |     
|Total income
tax expense |  |  |  | $    | 29,749 |      |  | $   








56


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




The tax effects of temporary
differences that give rise to the deferred tax assets and deferred tax liabilities at September 30, 2005 and 2004 are as follows:







|                                                                  |  |  |  | 2005 |        | 2004
|----------------------------------------------------------------- |  |  |  | ---- | ------ | ----
|
|Deferred tax
assets:                                              |  |  |  |      |        |     
|Allowance for
bad debts                                           |  |  |  | $    | 7,524  |     
|Deferred
compensation                                             |  |  |  |      | 2,527  |     
|Acquired net
operating loss carryforward                          |  |  |  |      | 101    |     
|Total
deferred tax assets                                         |  |  |  |      | 10,152 |     
|Deferred tax
liabilities:                                         |  |  |  |      |        |     
|Net deferred
loan fees and costs                                  |  |  |  |      | 6,979  |     
|FHLB stock
dividend                                               |  |  |  |      | 840    |     
|Premises and
equipment depreciation difference                    |  |  |  |      | 1,915  |     
|Insurance
agency intangibles                                      |  |  |  |      | 132    |     
|Installment
sales                                                 |  |  |  |      | 2      |     
|Total
deferred tax liabilities                                    |  |  |  |      | 9,868  |     
|                                                                  |  |  |  |      | (284   | )   
|Unrealized loss
on available for sale securities                  |  |  |  |      | (553   | )   
|Net deferred
tax asset                                            |  |  |  |      | (837   | )   
|                                                                  |  |  |  |      |        |     
|Less asset
(liability) at beginning of year                       |  |  |  |      | 1,000  |     
|Deferred tax
asset resulting from acquisition of insurance agency |  |  |  |      |       |     
|Change in
liability relating to SERP, net of tax                  |  |  |  |      | 107    |     
|Change in
unrealized loss on available for sale securities        |  |  |  |      | 367    |     
|Provision
(benefit) for deferred income taxes                     |  |  |  | $    | 637    |     



Income tax expense on income from
continuing operations is different than the amount computed by applying the U.S. Federal income tax rate of 35% for 2005, 2004 and 2003 to income from
continuing operations before income taxes because of the following:







|                                                     |  |  |  | 2005 |      | 2004 |  | 2003
|---------------------------------------------------- |  |  |  | ---- | ---- | ---- |  | ----
|                                                    
|Statutory
Federal income tax rate                    |  |  |  |      | 35.0 | %    |  |     
|State income tax
(net of Federal income tax benefit) |  |  |  |      | 3.6  |      |  |     
|Other                                                |  |  |  |      | .6   |      |  |     
|Effective tax
expense rate                           |  |  |  |      | 39.2 | %    |  |     



Deferred income tax assets of
approximately $837,000 and $1.0 million at September 30, 2005 and 2004 are included in other assets in the accompanying consolidated statements of
financial condition.




In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Taxable income for the years ended September 30, 2005 and 2004 was $77.1 million and $66.6 million
respectively. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. The
amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period
are reduced.









2005 Annual Report




57


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




Retained earnings at September
30, 2005 include approximately $14,800,000 base year tax bad debt reserve for which no deferred income tax liability has been recognized. The
Banks base year reserve of $14.8 million must be recaptured into taxable income as a result of certain non-dividend distributions. A distribution
is a non-dividend distribution to the extent that, for federal income tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution it, together with all other such distributions during the taxable year,
exceeds the Banks current and post-1951 accumulated earnings and profits. The amount charged against the Banks bad debt reserves with
respect to a distribution, which is includible in gross income, will equal the amount of such distribution, increased by the amount of federal income
tax resulting from such inclusion. The unrecorded deferred income tax liability on the above amounts was approximately $5,696,000 at September 30,
2005. No action resulted in the recapture of this amount for income tax purposes for the years ended September 30, 2005 and 2004,
respectively.


|(10) |  | Net Income per Share
|---- |  | --------------------



Net income per share was computed
by dividing net income by the weighted average number of shares of common stock outstanding during the year ended September 30, 2005, 2004 and 2003.
Adjustments have been made to give effect to the shares that would be outstanding, assuming the exercise of dilutive stock options and vesting of RRP
shares, all of which are considered common stock equivalents.







|                                                                                                            |  |  |  | Years ended September 30, |           
|----------------------------------------------------------------------------------------------------------- |  |  |  | ------------------------- | ----------
|
|                                                                                                            |  |  |  |                           |           
|Net
income                                                                                                  |  |  |  | $                         | 46,195,810
|                                                                                                            |  |  |  |                           |           
|Weighted average
common shares outstanding:                                                                 |  |  |  |                           |           
|Shares
outstanding                                                                                          |  |  |  |                           | 23,703,705
|Less:
weighted average uncommitted ESOP shares                                                              |  |  |  |                           | (893,159  
|Total                                                                                                       |  |  |  |                           | 22,810,546
|                                                                                                            |  |  |  |                           |           
|Basic net income
per share                                                                                  |  |  |  | $                         | 2.03      
|                                                                                                            |  |  |  |                           |           
|Weighted average
common shares outstanding                                                                  |  |  |  |                           | 22,810,546
|Additional
dilutive shares related to stock benefit plans                                                   |  |  |  |                           | 465,905   
|Total
weighted average common shares and equivalents outstanding for diluted earnings per share computation |  |  |  |                           | 23,276,451
|                                                                                                            |  |  |  |                           |           
|Diluted net
income per share                                                                                |  |  |  | $                         | 1.98      



Additional dilutive shares are
calculated under the treasury stock method utilizing the average market value of the Companys stock for the period. For the year ended September
30, 2005, there were 701 common stock options and 95 unvested RRP shares that were antidilutive and therefore not included in the above calculation.
For the year ended September 30, 2004, there were 1,195 common stock options and -0- unvested RRP shares that were antidilutive and therefore not
included in the above calculation. For the year ended September 30, 2003, there were 1,449 common stock options and -0- unvested RRP shares that were
antidilutive and therefore not included in the above calculation.


|(11) |  | Regulatory and Capital
Matters
|---- |  | ------------------------------



The Bank is subject to various
regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Companys
consolidated financial statements.









58


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures
of the Banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.




Quantitative measures established
by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). During
2000, the minimum ratio for Tier 1 capital was adjusted from 4% to 3% for savings associations that meet certain requirements. Management believes, as
of September 30, 2005, that the Bank meets all capital adequacy requirements to which it is subject.




As of September 30, 2005 and
2004, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the
institutions category. The Banks actual capital amounts and ratios are also presented in the table.







|                                                    |  |  |  | Actual |         | For capitaladequacy purpose |  | To be well capitalizedunder prompt
correctiveaction provisions |      
|--------------------------------------------------- |  |  |  | ------ | ------- | --------------------------- |  | -------------------------------------------------------------- | -----
|
|
|As of
September 30, 2005                            |  |  |  |        |         |                             |  |                                                                |      
|Total capital
(to risk-weighted assets)             |  |  |  | $      | 324,800 |                             |  |                                                                | 17.20
|Tier I (core)
capital (to risk-weighted assets)     |  |  |  |        | 305,959 |                             |  |                                                                | 16.20
|Tier I (core)
capital (to adjusted tangible assets) |  |  |  |        | 305,959 |                             |  |                                                                | 10.16
|Tangible
capital (to adjusted tangible assets)      |  |  |  |        | 305,959 |                             |  |                                                                | 10.16
|                                                    |  |  |  |        |         |                             |  |                                                                |      
|As of
September 30, 2004                            |  |  |  |        |         |                             |  |                                                                |      
|Total
capital (to risk-weighted assets)             |  |  |  | $      | 295,691 |                             |  |                                                                | 19.20
|Tier I (core)
capital (to risk-weighted assets)     |  |  |  |        | 278,577 |                             |  |                                                                | 18.09
|Tier I (core)
capital (to adjusted tangible assets) |  |  |  |        | 278,577 |                             |  |                                                                | 10.62
|Tangible
capital (to adjusted tangible assets)      |  |  |  |        | 278,577 |                             |  |                                                                | 10.62



The certificate of incorporation
of the Company provides that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares of common stock (the Limit) be entitled or permitted to any
vote in respect of the shares held in excess of the Limit.




The Company has authorized but
not issued preferred stock, subject to regulatory restrictions and determination of rights and preferences to be determined by the Board of
Directors.




Prior to March 18, 1998, the
Companys predecessor entity, Harbor Florida Bancorp, Inc. (Bancorp), was owned approximately 53.37% by Harbor Financial M.H.C.
(Mutual Holding Company) and 46.63% by public shareholders. On March 18, 1998, pursuant to a plan of conversion and reorganization, and
after a series of transactions: (1) a new entity, Bancshares, became the surviving corporate entity, (2) Bancshares sold the ownership interest in
Bancorp previously held by the Mutual Holding Company to the public in a subscription offering (the Offering) (16,586,752 common
shares









2005 Annual Report




59


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




at $10.00 resulting in net
cash proceeds after costs and funding the ESOP (See note 16) of approximately $150 million), (3) previous public shareholders of Bancorp had their
shares exchanged into 14,112,400 common shares of Bancshares (exchange ratio of 6.0094 to 1) (the Exchange), and (4) the Mutual Holding
Company ceased to exist. The total number of shares of common stock outstanding following the Offering and Exchange was 30,699,152. The reorganization
was accounted for in a manner similar to a pooling of interests and did not result in any significant accounting adjustments.




The plan of conversion provided
for the establishment of a special liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account
Holders in an amount equal to the amount of any dividends waived by the Mutual Holding Company plus the greater of (1) 100% of the Banks retained
earnings of $34.5 million at September 30, 1992, the date of the latest balance sheet contained in the final offering circular utilized in the
Banks initial public offering in the Mutual Holding Company reorganization, or (2) 53.41% of the Banks total stockholders equity as
reflected in its latest balance sheet contained in the final prospectus utilized in the Offering plus the amounts distributed to Bancorp by the Bank at
the formation of Bancorp in 1998. Each eligible Account Holder and Supplemental Eligible Account Holder, if such person were to continue to maintain
such persons deposit account at the Bank, would be entitled, upon a complete liquidation of the Bank after the conversion, to an interest in the
liquidation account prior to any payment to the Company as the sole stockholder of the Bank.




Applicable rules and regulations
of the OTS impose limitations on dividends paid by the Bank. Within those limitations, certain safe harbor dividends are permitted; subject
to providing the OTS with at least 30 days advance notice. The safe harbor amount is based upon an institutions regulatory capital level.
Thrift institutions which have capital in excess of all capital requirements before and after the proposed dividend, are permitted to make capital
distributions during any calendar year up to the greater of (i) 100% of net income to date during the calendar year, plus one-half of the surplus over
such institutions capital requirements at the beginning of the calendar year, or (ii) 75% of net income over the most recent four-quarter period.
Additional restrictions would apply to an institution that does not meet its capital requirement before or after a proposed dividend. As of September
30, 2005, $107,662,000 was available for distribution from the Bank to the holding company without further regulatory approval.


|(12) |  | Commitments and Contingencies
|---- |  | -----------------------------



At September 30, 2005, the
Company had irrevocable letters of credit aggregating approximately $21,307,000.




The Company and subsidiaries are
defendants in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial statements of the
Company and subsidiaries.


|(13) |  | Related Party Transactions
|---- |  | --------------------------



Directors, executive officers and
principal stockholders of the Company had certain transactions with the Company in the ordinary course of business, as described
below.




Loan transactions were made on
substantially the same terms as those prevailing at the time for comparable loans to other persons, did not involve more than normal risk of
collectibility, and are performing as agreed.




The summary of changes in the
related party loans follows:







|                                      |  |  |  | 2005 |        | 2004 |  | 2003
|------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|Outstanding
loans  beginning of year |  |  |  | $    | 4,549  |      |  | $   
|New
loans                             |  |  |  |      | 4,885  |      |  |     
|Repayments                            |  |  |  |      | (1,810 | )    |  |     
|Outstanding
balance  end of year     |  |  |  | $    | 7,624  |      |  | $   








60


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




Frank H. Fee, III, a director of
the Company, is also President of the law firm of Fee & Fee, P.A., which does business under the registered name of Fee, DeRoss & Fee, a
general practice law firm. The Company paid approximately $98,000, $95,000, and $96,000, of legal fees in the years ended September 30, 2005, 2004 and
2003, respectively, to this law firm.


|(14) |  | Occupancy and Other Expense
|---- |  | ---------------------------



Occupancy and other expense for
the years ended September 30, 2005, 2004 and 2003 consists of the following:







|                          |  |  |  | 2005 |       | 2004 |  | 2003
|------------------------- |  |  |  | ---- | ----- | ---- |  | ----
|
|                         
|Occupancy                 |  |  |  | $    | 3,788 |      |  | $   
|Furniture and
equipment   |  |  |  |      | 4,035 |      |  |     
|Total
occupancy           |  |  |  | $    | 7,823 |      |  | $   
|                         
|Deposit account
losses    |  |  |  | $    | 1,309 |      |  | $   
|Postage                   |  |  |  |      | 679   |      |  |     
|Telephone                 |  |  |  |      | 652   |      |  |     
|Office supplies
and forms |  |  |  |      | 561   |      |  |     
|Other                     |  |  |  |      | 3,990 |      |  |     
|Total
other               |  |  |  | $    | 7,191 |      |  | $   

|(15) |  | Disclosures About Fair Value of Financial
Instruments
|---- |  | -----------------------------------------------------



The following methods and
assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that
value:




Cash and Amounts Due From
Depository Institutions and Interest-Bearing Deposits in Other Banks  The carrying amount of these assets is a reasonable estimate of their
fair value.




Investment Securities and
Mortgage-Backed Securities Held to Maturity  Fair value equals quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.




Investment Securities
Available for Sale  Fair value equals carrying value, which equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar securities.




Loans  The fair
value of loans is estimated by discounting future cash flows using the current rate at which similar loans would be made to borrowers with similar
credit ratings for the same remaining maturities.




Deposits  The fair
value of demand deposits, interest-bearing checking accounts, savings and money market deposits is the amount payable on demand at the reporting date.
The fair value of certificate accounts is estimated by discounting future cash flows using the rates currently offered for deposits of similar
remaining maturities.




Short-term borrowings and
long-term debt  The fair value of FHLB advances is estimated based on rates currently available to the Company for FHLB advances with similar
terms and maturities.




Commitments to Extend Credit
and Standby Letters of Credit  The fair value of commitments is insignificant.









2005 Annual Report




61


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




The estimated fair values of the
Companys financial instruments at September 30, 2005 and 2004 are as follows:







|                                                                                                            |  |  |  | 2005 |           | 2004 | 
|----------------------------------------------------------------------------------------------------------- |  |  |  | ---- | --------- | ---- | 
|
|
|Assets:                                                                                                     |  |  |  |      |           |      | 
|Cash and
amounts due from depository institutions                                                           |  |  |  | $    | 81,245    |      | 
|Interest-bearing deposits in other banks                                                                    |  |  |  |      | 23,689    |      | 
|Investment
securities held to maturity                                                                      |  |  |  |      | 285       |      | 
|Investment
securities available for sale                                                                    |  |  |  |      | 128,586   |      | 
|Mortgage-backed securities held to maturity                                                                 |  |  |  |      | 388,458   |      | 
|Loans held
for sale                                                                                         |  |  |  |      | 10,695    |      | 
|                                                                                                            |  |  |  |      |           |      | 
|Loans                                                                                                       |  |  |  |      | 2,295,609 |      | 
|Less:
allowance for loan losses                                                                             |  |  |  |      | (19,748   | )    | 
|Loans,
net                                                                                                  |  |  |  |      | 2,275,861 |      | 
|                                                                                                            |  |  |  |      |           |      | 
|Liabilities:                                                                                                |  |  |  |      |           |      | 
|Commercial
checking, noninterest-bearing personal, NOW, passbook, money market accounts and official checks |  |  |  |      | 1,030,654 |      | 
|Certificate
accounts                                                                                        |  |  |  |      | 1,025,653 |      | 
|Short-term
borrowings                                                                                       |  |  |  |      | 5,000     |      | 
|Long-term
debt                                                                                              |  |  |  |      | 590,473   |      | 



Fair value estimates are made at
a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular financial instrument.
Because no market exists for a portion of the Companys financial instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.


|(16) |  | Benefit Plans
|---- |  | -------------



Employee Stock
Ownership Plan




In March 1998, as part of the
reorganization and conversion of Harbor Financial, M.H.C., the Companys ESOP purchased 1,326,940 shares of the Companys common stock at $10
per share, which was funded by a loan from the Company. The ESOP covers all eligible employees of the Company age 21 and over. Dividends paid on
unallocated shares reduce the Companys cash contribution to the ESOP. The ESOPs borrowing from the Company is eliminated in consolidation.
At September 30, 2005, there were 943,038 allocated shares, 52,379 shares committed to be released, and 855,527 suspense (unallocated and not yet
committed to be released) shares held by the ESOP. As shares are released, the Company recognizes compensation expense equal to the current market
price of the shares. Allocated shares and shares committed to be released are included in the weighted average common shares outstanding used to
compute earnings per share. Total compensation expense charged to earnings in the years ended September 30, 2005, 2004 and 2003, totaled $2,432,699,
$2,019,691, and $1,688,264, respectively. At September 30, 2005, the fair value of the unallocated shares was $32,929,751.









62


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




During the year ended September
30, 2004, the Company paid to the Internal Revenue Service (IRS) $505,000 under a settlement agreement related to an operational adjustment in
its ESOP. The non-deductible amount is included in other liabilities and other expense at September 30, 2004. The Company also recognized a tax
benefit of $545,000 from the settlement with the IRS.




Recognition and
Retention Plans and Stock Option Plans




The Companys 1998 Stock
Incentive Plan, adopted on September 18, 1998, authorizes the award of Recognition and Retention Plan Shares (RRP shares) and the granting of options
to purchase common stock. As of September 30, 2005, the Company has awarded 629,202 RRP shares at $11.53 average price per share totaling $7,251,683.
The total award will be amortized as compensation expense ratably over the participants vesting periods of 5 to 10 years. In November and
December, 1998, the Companys Recognition and Retention Plan (RRP) purchased 663,470 shares from market sources at an average cost of $10.81 per
share totaling $7,171,000 in order to fund the grants of RRP shares. Total compensation expense charged to earnings in the years ended September 30,
2005, 2004 and 2003, totaled $761,348, $781,033, and $908,294, respectively.




At September 30, 2005, the
Company had stock option plans for the benefit of directors, officers, and other employees of the Company. The Company applies APB 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans since stock option
exercise prices are equal to market price at dates of grant. The number of shares of common stock reserved for issuance under the 1994 stock option
plan is equal to 1,286,012 shares, or 9.6% of the total number of common shares issued in the minority offering pursuant to the Companys
reorganization to the stock form of ownership. The number of shares of common stock reserved for issuance under the 1998 Stock Incentive Plan is equal
to 1,658,675 or 5.40% of the outstanding shares of common stock as of the effective date of the plan. The stock options vest in equal installments over
varying periods not to exceed 10 years, depending upon the individuals position in the Company. At September 30, 2005, 124,124 shares were
available for future awards.




A summary of the Companys
stock option plans is presented below:







|                                                               |  |  |  | Years Ended September 30, |          
|-------------------------------------------------------------- |  |  |  | ------------------------- | ---------
|
|
|                                                               |  |  |  |                           |          
|Options
outstanding beginning of year                          |  |  |  |                           | 1,045,406
|Options
granted                                                |  |  |  |                           | 41,500   
|Options
exercised                                              |  |  |  |                           | (206,100 
|Options
forfeited                                              |  |  |  |                           | (13,185  
|Options
outstanding at year-end                                |  |  |  |                           | 867,621  
|Options
exercisable at year-end                                |  |  |  |                           | 523,481  
|Weighted
average fair value of options granted during the year |  |  |  | $                         | 10.82    








2005 Annual Report




63


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




The following table summarizes
information about stock options outstanding at September 30, 2005:







|                |  |  |  | Options outstanding |         | Options exercisable | 
|--------------- |  |  |  | ------------------- | ------- | ------------------- | 
|
|$10.69 to
12.00 |  |  |  |                     | 554,634 |                     | 
|$12.38 to
14.63 |  |  |  |                     | 119,270 |                     | 
|$15.06 to
16.35 |  |  |  |                     | 44,622  |                     | 
|$17.00 to
20.10 |  |  |  |                     | 32,500  |                     | 
|$21.13 to
27.05 |  |  |  |                     | 55,075  |                     | 
|$27.06 to
31.46 |  |  |  |                     | 22,520  |                     | 
|$31.47 to
36.32 |  |  |  |                     | 39,000  |                     | 
|Total           |  |  |  |                     | 867,621 |                     | 



Other
Plans




The Company has a
non-contributory defined benefit pension plan (the Pension Plan) covering all full-time employees hired before January 1, 2003 who have
attained one year of service. The Pension Plan is a multi-employer plan. Separate actuarial valuations are not made for each employer nor are plan
assets so segregated. The assumed average rate of return used in determining the actuarial present value of accumulated plan benefits was 7.75%. The
date of the most recent actuarial evaluation is July 1, 2005. The Company elected to freeze the Pension Plan to all participants effective June 30,
2004. The Company expects to be required to contribute approximately $2.0 million for fiscal year 2006. Pension expense was $1,022,000, $1,195,000, and
$393,000, respectively, for the years ended September 30, 2005, 2004 and 2003.




The Companys 401(k) Profit
Sharing Plan and Trust (the 401(k) Plan) covers all eligible employees of the Company age 21 and over. An eligible employee may elect to
contribute to the 401(k) Plan in the form of deferrals of between 1% and 15% of the total compensation that would otherwise be payable to the employee.
Employee contributions are fully vested and nonforfeitable at all times. The 401(k) Plan permits contributions by the Company. The Company currently
makes matching contributions of 50% of the first 6% of each participants contributions. For the years ended September 30, 2005, 2004 and 2003,
the Companys matching contribution totaled approximately $409,000, $217,000, and $157,000, respectively.




The Company has a deferred
compensation plan for Directors (the Directors Deferred Compensation Plan) who may elect to defer all or part of their annual
director fees to fund the Directors Deferred Compensation Plan. The plan provides that deferred fees are to earn interest at an annual rate equal
to the 30-month certificate of deposit rate, adjusted and compounded quarterly. At September 30, 2005 and 2004, deferred directors fees included
in other liabilities aggregated $208,608 and $210,833, respectively. Directors may elect to have their deferred compensation balance invested in shares
of the Companys common stock. Such purchases were approximately $399,000, $337,000, and $289,000, in 2005, 2004 and 2003, respectively. After
purchase of shares of the Companys common stock, the Companys liability has been satisfied except for distribution of the shares to the
director when he ceases to be a director. At September 30, 2005 and 2004, the Directors Deferred Compensation Plan held 313,434 and 310,586
shares of the Companys common stock, respectively.




The Company has a retirement plan
for non-employee directors elected to the Board prior to October 9, 1996 (the Plan). The annual basic benefit under the Plan is based on a
percentage of the average three years directors fees preceding the termination of service multiplied by the number of years of service, not to
exceed 50% of the average









64


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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




annual directors fees.
During the years ended September 30, 2005, 2004 and 2003, the charge to earnings relating to the Plan was insignificant.




The Company has an unfunded
supplemental executive retirement plan (SERP) for the benefit of Michael J. Brown, Sr. The annual basic benefit provides for 75% of his final five-year
average earnings less amounts paid from the Pension Plan and the amount expected to be paid as a social security benefit. The Company elected to freeze
the SERP effective June 30, 2004. The benefit will be reduced on a pro rata basis if Mr. Brown retires or otherwise terminates his employment
before age 65. Additionally, the benefit will be reduced by 3% for each year before age 65 that his benefit commences. At September 30, 2005 and 2004,
the liability related to the SERP was $1,651,000 and $1,277,000, respectively. Included in the liability at September 30, 2005 is $278,000 additional
minimum liability that was recorded as other comprehensive income ($170,000, net of tax). During the years ended September 30, 2005, 2004 and 2003, the
charge to earnings related to the SERP was $98,000, $280,000 and $202,000, respectively.


|(17) |  | Acquisition of Insurance
Agencies
|---- |  | ---------------------------------



On March 27, 2003, Harbor
Insurance Agency, a subsidiary of Harbor Federal Savings Bank, completed its acquisition of the David G. Willbur Insurance Agency for approximately
$600,000 in cash. David G. Willbur Insurance Agency has specialized in property and casualty insurance and has served the residents and businesses of
St. Lucie county for over 76 years. The principal owner, David G. Willbur, joined the management team for Harbor Insurance Agency, Inc. The acquisition
further complements Harbor Insurance Agencys existing line of insurance products and provides an even broader range of insurance company
providers to meet the changing and growing needs of our customers.




The acquisition was accounted for
using the purchase method. The results of operations of the insurance agency acquired is included in the consolidated financial statements of the
Company from the date of acquisition.




The fair value of assets acquired
and liabilities assumed in conjunction with the acquisition of the insurance agency was as follows:







|                                              |  |  |  | 2003
|--------------------------------------------- |  |  |  | ----
|Cash                                          |  |  |  | $   
|Premises and
equipment                        |  |  |  |     
|Goodwill                                      |  |  |  |     
|Other
intangibles subject to amortization     |  |  |  |     
|Other
assets                                  |  |  |  |     
|Fair value of
assets acquired                 |  |  |  |     
|Deferred tax
liability                        |  |  |  |     
|Other
liabilities                             |  |  |  |     
|Fair value of
liabilities assumed             |  |  |  |     
|Fair value of
net assets acquired             |  |  |  |     
|Acquisition
costs                             |  |  |  |     
|Purchase of
insurance agencies                |  |  |  |     
|Less cash
acquired                            |  |  |  |     
|Treasury
shares issued                        |  |  |  |     
|Net cash used
in purchase of insurance agency |  |  |  | $   








2005 Annual Report




65


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




As of September 30, 2005,
goodwill related to purchase of insurance agencies is approximately $1.6 million. Other intangibles subject to amortization includes a $400,000
intangible related to Wilburs customer base, amortized over 15 years, and a $15,000 non-compete agreement, amortized over 5 years. The remaining
balance of other intangibles at September 30, 2004 was $340,800 and is included in other assets in the accompanying consolidated statements of
financial condition.




The Company did not recognize an
impairment loss on goodwill during the years ended September 30, 2005, 2004 and 2003.


|(18) |  | Quarterly Results of Operations
(Unaudited)
|---- |  | -------------------------------------------



The quarterly results of
operations for the years ended September 30, 2005 and 2004 are as follows:







|                                                    |  |  |  | For the three months ended fiscal
2005 |       
|--------------------------------------------------- |  |  |  | -------------------------------------- | ------
|
|
|                                                   
|Interest
income                                     |  |  |  | $                                      | 44,158
|Interest
expense                                    |  |  |  |                                        | 15,971
|Net interest
income                                 |  |  |  |                                        | 28,187
|Provision for
loan losses                           |  |  |  |                                        | 464   
|Net interest
income after provision for loan losses |  |  |  |                                        | 27,723
|Total other
income                                  |  |  |  |                                        | 6,690 
|Total other
expenses                                |  |  |  |                                        | 14,661
|Income before
income taxes                          |  |  |  |                                        | 19,752
|Income
tax                                          |  |  |  |                                        | 7,740 
|Net
income                                          |  |  |  | $                                      | 12,012
|Net income
per share:                               |  |  |  |                                        |       
|Basic                                               |  |  |  | $                                      | 0.52  
|Diluted                                             |  |  |  | $                                      | 0.51  








66


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS







|                                                    |  |  |  | For the three months ended fiscal
2004 |       
|--------------------------------------------------- |  |  |  | -------------------------------------- | ------
|
|
|                                                   
|Interest
income                                     |  |  |  | $                                      | 36,843
|Interest
expense                                    |  |  |  |                                        | 12,385
|Net interest
income                                 |  |  |  |                                        | 24,458
|Provision for
loan losses                           |  |  |  |                                        | 350   
|Net interest
income after provision for loan losses |  |  |  |                                        | 24,108
|Total other
income                                  |  |  |  |                                        | 5,558 
|Total other
expenses                                |  |  |  |                                        | 12,557
|Income before
income taxes                          |  |  |  |                                        | 17,109
|Income
tax                                          |  |  |  |                                        | 6,002 
|Net
income                                          |  |  |  | $                                      | 11,107
|Net income
per share:                               |  |  |  |                                        |       
|Basic                                               |  |  |  | $                                      | 0.49  
|Diluted                                             |  |  |  | $                                      | 0.48  

|(19) |  | Comprehensive Income
|---- |  | --------------------



The Companys other
comprehensive income is summarized as follows for the years ended September 30, 2005, 2004 and 2003:







|                                                                               |  |  |  | 2005 |        | 2004 |  | 2003
|------------------------------------------------------------------------------ |  |  |  | ---- | ------ | ---- |  | ----
|
|Unrealized
(losses) gains on securities available for sale:                    |  |  |  |      |        |      |  |     
|Unrealized
holding (losses) gains arising during the period                    |  |  |  | $    | (853   | )    |  | $   
|Less:
reclassification adjustment for net realized gain included in net income |  |  |  |      | 98     |      |  |     
|Net
unrealized (losses) gains                                                  |  |  |  |      | (951   | )    |  |     
|Additional
minimum liability for SERP                                          |  |  |  |      | (278   | )    |  |     
|Total                                                                          |  |  |  |      | (1,229 | )    |  |     
|Tax
effect                                                                     |  |  |  |      | (475   | )    |  |     
|Other
comprehensive (loss) income, net of tax                                  |  |  |  | $    | (754   | )    |  | $   








2005 Annual Report




67


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


|(20) |  | Parent Company Financial
Information
|---- |  | ------------------------------------



Condensed Statements of Financial
Condition at September 30, 2005 and 2004 and Condensed Statements of Operations and Cash Flows for the years ended September 30, 2005, 2004 and 2003
are shown below (in thousands) for Bancshares:




Condensed Statements
of Financial Condition




September 30, 2005
and 2004







|                                             |  |  |  | 2005 |         | 2004
|-------------------------------------------- |  |  |  | ---- | ------- | ----
|
|Assets:                                      |  |  |  |      |         |     
|Cash
deposited at Harbor Federal             |  |  |  | $    | 6,247   |     
|Investment in
and advances to Harbor Federal |  |  |  |      | 314,280 |     
|Income tax
receivable from Harbor Federal    |  |  |  |      | 8       |     
|Total
assets                                 |  |  |  | $    | 320,535 |     
|                                             |  |  |  |      |         |     
|Liabilities
and Stockholders Equity:        |  |  |  |      |         |     
|Liabilities:                                 |  |  |  |      |         |     
|Income tax
payable to Harbor Federal         |  |  |  | $    |        |     
|Other
liabilities                            |  |  |  |      | 25      |     
|Total
liabilities                            |  |  |  |      | 25      |     
|Stockholders Equity                         |  |  |  |      | 320,510 |     
|Total
liabilities and stockholders equity   |  |  |  | $    | 320,535 |     








68


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




Condensed Statements
of Operations




Years ended
September 30, 2005, 2004 and 2003







|                                                               |  |  |  | 2005 |        | 2004 |  | 2003
|-------------------------------------------------------------- |  |  |  | ---- | ------ | ---- |  | ----
|
|                                                              
|Interest on
investment securities                              |  |  |  | $    |       |      |  | $   
|Total
interest income                                          |  |  |  |      |       |      |  |     
|Gain on sale
of securities available for sale                  |  |  |  |      |       |      |  |     
|Total other
income                                             |  |  |  |      |       |      |  |     
|Other
expense:                                                 |  |  |  |      |        |      |  |     
|Management
fee to Harbor Federal                               |  |  |  |      | 212    |      |  |     
|Other
expenses                                                 |  |  |  |      | 375    |      |  |     
|Total other
expense                                            |  |  |  |      | 587    |      |  |     
|(Loss) income
before income tax and earnings of Harbor Federal |  |  |  |      | (587   | )    |  |     
|Income tax
(benefit) expense                                   |  |  |  |      | (145   | )    |  |     
|(Loss) income
before earnings of Harbor Federal                |  |  |  |      | (442   | )    |  |     
|Equity in net
earnings of Harbor Federal                       |  |  |  |      | 46,638 |      |  |     
|Net
income                                                     |  |  |  | $    | 46,196 |      |  | $   








2005 Annual Report




69


---



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




Condensed Statements of Cash
Flows




Years ended
September 30, 2005, 2004 and 2003







|                                                                               |  |  |  | 2005 |         | 2004 |  | 2003
|------------------------------------------------------------------------------ |  |  |  | ---- | ------- | ---- |  | ----
|
|Cash flows
from operating activities:                                          |  |  |  |      |         |      |  |     
|Net
income                                                                     |  |  |  | $    | 46,196  |      |  | $   
|Adjustments
to net income:                                                     |  |  |  |      |         |      |  |     
|Equity in
earnings of Harbor Federal                                           |  |  |  |      | (46,638 | )    |  |     
|Gain on sale
of securities available for sale                                  |  |  |  |      |        |      |  |     
|Decrease in
accrued interest receivable                                        |  |  |  |      |        |      |  |     
|Increase
(decrease) in income tax receivable                                   |  |  |  |      | (489    | )    |  |     
|Decrease in
other assets                                                       |  |  |  |      |        |      |  |     
|Increase in
payable to Harbor Federal                                          |  |  |  |      |        |      |  |     
|Increase
(decrease) in other liabilities                                       |  |  |  |      |        |      |  |     
|Net cash used
in operating activities                                          |  |  |  |      | (931    | )    |  |     
|                                                                               |  |  |  |      |         |      |  |     
|Cash flows
from investing activities:                                          |  |  |  |      |         |      |  |     
|Sale of
investment securities available for sale                               |  |  |  |      |        |      |  |     
|Net cash
provided by investing activities                                      |  |  |  |      |        |      |  |     
|                                                                               |  |  |  |      |         |      |  |     
|Cash flows
from financing activities:                                          |  |  |  |      |         |      |  |     
|Net amounts
received from Harbor Federal                                       |  |  |  |      | 21,543  |      |  |     
|Dividends
paid                                                                 |  |  |  |      | (17,298 | )    |  |     
|Purchase of
treasury stock                                                     |  |  |  |      | (664    | )    |  |     
|Common stock
options exercised                                                 |  |  |  |      | 2,306   |      |  |     
|Net cash
provided by (used in) financing activities                            |  |  |  |      | 5,887   |      |  |     
|                                                                               |  |  |  |      |         |      |  |     
|Net increase
(decrease) in cash and cash equivalents                           |  |  |  |      | 4,956   |      |  |     
|                                                                               |  |  |  |      |         |      |  |     
|Cash and cash
equivalents  beginning of year                                  |  |  |  |      | 1,291   |      |  |     
|                                                                               |  |  |  |      |         |      |  |     
|Cash and cash
equivalents  end of year                                        |  |  |  | $    | 6,247   |      |  | $   
|                                                                               |  |  |  |      |         |      |  |     
|Supplemental
disclosures:                                                      |  |  |  |      |         |      |  |     
|Changes in
unrealized (loss) gain on securities available for sale, net of tax |  |  |  | $    | (584    | )    |  | $   
|Increase in
liability related to SERP, net of tax                              |  |  |  |      | (170    | )    |  |     
|Amortization
of stock benefit plans                                            |  |  |  |      | 2,433   |      |  |     
|Tax benefit
of employee benefit plans                                          |  |  |  |      | 886     |      |  |     
|Distribution
of RRP shares                                                     |  |  |  |      | 547     |      |  |     








70


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